Credit Card Delinquency Rates Hit Multi-Year Lows Amid Consumer Concerns
The delinquency rate for credit cards, specifically those provided by commercial banks, has dipped to a seasonally adjusted 2.94% by the end of the fourth quarter. This marks the lowest point since the third quarter of 2023, down from 3.08% a year prior and 3.10% two years ago, according to the Federal Reserve’s latest report from regulatory filings. Notably, this figure encompasses cards held by subprime-rated borrowers.
The non-seasonally adjusted rate stood at 3.03%, also the lowest for the fourth quarter since 2022.
Previously, during an era of easy credit, delinquency rates had reached notably low levels. Once the easy money phase ended, these rates did see a slight uptick but have begun to decrease again in 2024. Despite some fluctuations, current rates remain relatively low when compared to 25 years of historical data.
Credit card balances, which reflect spending rather than borrowing, increased to $1.28 trillion in the fourth quarter, with a year-on-year growth of $69 billion (5.7%). This rise is attributed to both increased spending and inflation, as noted in reports from the New York Fed based on Equifax data.
This data doesn’t account for seasonal changes. Typical spending spikes during the holiday season usually gives way to a decline in the first quarter, suggesting that spending growth still appears robust.
Meanwhile, “Other” consumer financing categories—personal loans and buy now, pay later (BNPL) options, among others—expanded by 1.1% year-on-year to $560 billion, although this figure lags behind inflation. Unlike credit cards, many of these debts can accrue interest and have seen only marginal increases over the last two decades, even as population and spending have grown.
The overall financial health of consumers seems stable. Many households, around 65%, own their homes. Interestingly, about 40% of those homeowners have no mortgage, and others have refinanced to lighter mortgages. Additionally, over 60% of families hold some form of asset, be it precious metals or cryptocurrencies. Some are even sitting on cash reserves that are accumulating interest.
Paying Off Credit Card Balances
Combining credit card and other consumer debt shows an increase of $75 billion (4.2%) year-over-year, totaling $1.84 trillion. The debt-to-income ratio is a common metric for measuring debt burden, focusing on disposable income—which, as defined by the U.S. Bureau of Economic Analysis, is what remains after taxes are paid. This income allows for both spending and saving—a crucial factor in understanding consumer behavior.
As of now, credit card and consumer loan balances as a percentage of disposable income are at 8.0%, consistent with figures from the previous two years and lower than pre-pandemic levels. This trend indicates less strain compared to financial conditions seen before the last crisis.
Record Levels of Available Credit
For banks, credit cards generate significant profits through transaction fees. Consequently, they’re incentivizing new account openings and usage, often offering cash back or rewards for spending more. This has led to total credit limits reaching a record $5.4 trillion, with unused credits also hitting a historic high of $4.15 trillion.
Decline in Third-Party Collections
A credit card account transitions to delinquency when payments are missed or no transactions occur. When lenders sell delinquent debts to collection agencies, this can adversely affect a consumer’s credit history. Remarkably, the proportion of consumers with third-party collections on their credit reports dropped to 4.6% in the fourth quarter—an all-time low.
This wraps up our quarterly review of consumer debt and credit trends. If you’re interested in previous reports, they cover various aspects of household debt including delinquencies and foreclosures.
