After several years of shop till you drop, Americans are dropping fast.
Delinquency rates for credit card payments, auto loans, and consumer loans are at their highest levels in a decade, and they could get even worse, The Washington Post reported.
The Trillion-Dollar Hole
During the pandemic, stimulus checks, unemployment payments, and pauses on student loans and rent made big spenders out of all of us. But those programs have ended, family savings are tapped out, and inflation has made everything from shelter to food more costly.
For the first time ever, Americans are on the hook for more than $1 trillion in credit card debt, with the delinquency rate at 3.8%, according to Moody’s. Additionally, 5.4% of consumer loans and 3.6% of auto loans are late, too. And with the average credit card interest rate at roughly 21%, payments can really stack up as many households make the tough decision of “whether to pay their credit card bills, their rent, or buy groceries,” Mark Zandi of Moody’s Analytics told the WP.
For those drowning in debt and anxiously awaiting the restart of student loans, relief can feel far away:
- Some Americans are so strapped for cash that they’re resorting to buy-now-pay-later (BNPL) options. These can work well for larger purchases that you can afford like a furniture set or a new TV, but a recent survey from LendingTree, found 21% of respondents saying they used BNPL loans just to buy groceries.
- The holiday season is coming up, the time of the year when people instinctively splurge. For the past decade, consumer spending increased each holiday season, and in 2022, it grew 5.3% to roughly $940 billion, according to the National Retail Federation. While researcher Coresight expects another season of low-single-digit growth for 2023, that doesn’t happen without Americans assuming still more debt.
The problems are also hitting retailers that offer private credit cards. Macy’s CFO Adrian Mitchell recently told investors that while the company expected delinquencies to climb in the second quarter, the rate of increase was faster than originally thought. “Other revenue,” which includes credit card payments, dropped $84 million YoY to $120 million. Plus, Visa and Mastercard just announced they’ll be raising charge fees for certain purchases when customers use their credit cards at retailers, which could result in merchants paying an additional $502 million annually in fees, The Wall Street Journal reported.
Breakfast Talk: With a Fed intent on slowing down inflation, even at the risk of some economic collateral damage, it’s not necessarily a surprise to see a corresponding rise in delinquent loan payments and poor consumer confidence. It’s essentially the Fed’s version of “if you want to make an omelet you have to break a few eggs,” only those eggs are unfortunately low-income Americans.