July 12, 2024

Rising Credit Card Delinquencies Sound Alarm Bells: Are Economic Troubles Looming?

Image Credits: Roberto Machado Noa/LightRocket via / Getty Images

Credit card delinquencies are making waves in the financial world. According to a new report from Wells Fargo, more and more Americans are finding it challenging to keep up with their monthly credit card payments, and this could spell trouble for the economy ahead.

Wells Fargo’s findings reveal that credit card delinquencies are rising, particularly among small lenders, pushing late payments at smaller banks outside the top 100 in asset size to a record high. This puts additional pressure on small- and medium-sized banks, already grappling with tightening credit conditions due to recent bank failures.

“The economy still has a cash cushion, but many consumers are exhausting their credit, while income growth has slowed sharply,” the Wells Fargo strategists wrote in the note. “Our outlook remains for a short, moderate recession and then recovery for most of 2024 and likely into 2025.”

This report comes when there are signs that Americans increasingly rely on credit cards to cover everyday expenses. The New York Federal Reserve reported a staggering increase in total credit card debt, reaching $1.03 trillion during the three months from April to June,  a 4.6% increase from the previous quarter and an all-time high since 2003.

The record-high interest rates make this situation even more alarming, with the average credit card annual percentage rate (APR) hitting 20.63%. This surpasses the previous high of 19% in July 1991, according to Bankrate’s historical data dating back to 1985. If you owe the average American debt of $5,000, it would take approximately 279 months and $8,124 in interest to pay it off with minimum payments.

Additionally, there’s a rise in borrowers struggling with credit card and auto loan payments, though it’s still lower than pre-pandemic levels. However, experts worry that delinquency rates might climb higher when student loan payments resume in the fall following the Supreme Court’s rejection of President Biden’s forgiveness plan.

Chief LendingTree credit analyst Matt Schulz voiced his concern, saying, “When it comes to delinquencies as a whole, I think that Americans, for the most part, have been doing a really good job for the past couple of years handling their business. But there’s only so much that can be expected of them. And with lingering inflation, rising interest rates, growing credit card debt, and now the reintroduction of student loan payments, it makes all the sense in the world that we would see delinquencies begin to rise a little more quickly than they already were.” 

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