In this photo illustration, the Visa, Mastercard, and American Express logos of various credit and debit cards are seen next to a US $1 bill on January 4, 2025 in Somerset, England.
Anna Barclay | Getty Images
Consumer stress is intensifying and the percentage of credit card holders making only the minimum payment on their bills is increasing, according to a Philadelphia Federal Reserve Board report.
In fact, data through the third quarter of 2024 shows that the percentage of active holders making only basic payments on their cards has surged to a 12-year high.
The level rose to 10.75% over the same period, part of a continuing trend that began in 2021 and accelerated as average interest rates soared and delinquencies accelerated. This increase was the highest ever for a dataset that started in 2012.
Along with the trend in minimum payments, delinquency rates are also increasing.
The percentage of cardholders whose payments were more than 30 days past due rose from 3.21% to 3.52%, an increase of more than 10%. It is also more than double the pandemic-era low delinquency level of 1.57% recorded in the second quarter of 2021.
The news comes at a time when inflation is expected to hit its highest level in more than 40 years in mid-2022, and a general public of healthy consumers continuing to spend despite inflation reaching its highest level in more than 40 years in mid-2022 and remaining above the Fed’s 2% target for nearly four years. refutes that view.
signs of strength
To be sure, there are still many bright spots. Although the delinquency rate is rising, it is still well below its peak of 6.8% during the 2008-2009 financial crisis and does not indicate serious strain.
“There are still a lot of unknowns, and we’ve seen in recent days how quickly things can change,” said Elizabeth Renter, senior economist at personal finance firm NerdWallet. “The fundamental expectation is that aggregate consumer spending across the economy will remain strong.”
After adjusting for inflation, personal consumption spending rose an annualized 2.9% in November, according to Goldman Sachs. Goldman Sachs said Tuesday that it views consumers as a “source of strength” for the economy. The firm expects consumer spending to slow slightly in 2025 but still grow at a healthy 2.3% in real terms this year, and Goldman sees delinquency rates showing signs of leveling off.
However, if strong consumer spending trends hold, they will be exposed to some formidable headwinds.
Average interest rates on credit cards rose to 21.5%, about 50% higher than three years ago, according to Federal Reserve data. Investopedia estimates the average interest rate even higher at 24.4%, and points out that so-called low-cost cards given to borrowers with poor or no credit history exceed 30%. Consumers aren’t getting any help from the Fed. Despite the central bank cutting benchmark interest rates across the board last year, credit card costs continue to rise.
Those interest rates have reached much higher balances, with outstanding revolving credits at $645 billion in the second quarter of 2021, up 52.5% from a 10-year low of $423 billion, according to the Philadelphia Fed. It swelled to .
Renter noted that in its own consumer research, a growing number of people (now 48%) say they use credit cards for essentials. What’s more, NerdWallet’s research found that the percentage of people who say they only make the minimum payment is even higher, at around 22%.
According to NerdWallet, the average credit card balance is $10,563, and it takes 22 years and $18,000 in interest just to make the minimum payment.
“As prices rise, people will turn to credit cards to buy essentials, and higher interest rates will make life even more difficult,” Renter said. “If they’re only paying the bare minimum, they can quickly go from being able to survive to drowning.”
The trend in that direction is not encouraging. According to the recently released December survey from the New York Fed, the average probability of defaulting on minimum debt payments over the next three months was 14.2%, the highest level since April 2020, tied with September.
Mortgage is slow
It’s not just credit cards that are feeling the strain on household finances.
The number of home loan originations in the third quarter also hit a 12-year low, according to a report from the Philadelphia Fed. It peaked at $219 billion in Q3 2021, but three years later the origination value is only $63 billion.
“High mortgage rates have left consumers locked into low fixed-rate mortgages with little incentive to refinance, reducing demand for mortgages,” the central bank branch said in a report. Ta.
Furthermore, the debt-to-income ratio of mortgages is also on the rise, most recently reaching 26%, an increase of 4 percentage points over the past five years.
Typical 30-year mortgage rates have recently risen above 7%, creating a new hurdle for housing and homeownership.
