More Americans are falling behind on their car loan and credit card payments than at any time in more than a decade, a troubling signal of consumer stress as higher prices and rising borrowing costs are squeezing household budgets.
The pain is most acute for lower-income earners, who have largely used whatever they managed to save during the pandemic with the help of government stimulus checks and breaks on obligations such as rent and student loans.
“The increase in delinquencies and defaults is symptomatic of the tough decisions that these households are having to make right now — whether to pay their credit card bills, their rent or buy groceries,” said Mark Zandi, chief economist at Moody’s Analytics.
Now, as the economy finds its post-pandemic footing, there are signs the hardship for millions of consumers will get worse before it improves. The average credit card interest rate — already at a record high 20.6 percent, according to Bankrate.com — appears likely to keep climbing, as the Federal Reserve indicated it could continue raising interest rates to get inflation under control. Student loan payments that were paused for more than three years are poised to resume in October. And banks and other lenders have been clamping down on credit for months, a process that accelerated after the spring banking crisis sent shock waves through the industry.
That pain is in some sense an indication to Fed policymakers that their push to tame inflation is working, said Torsten Slok, chief economist at Apollo Global Management.
“The Fed might look at this and say this is the whole purpose of raising rates, to make it more difficult” to make purchases, he said. “The bigger question is when the Fed will have succeeded in slowing down the broader economy, and how many consumers have to be impacted in a negative way.”
Economists say they see little risk yet of a looming recession in consumers’ mounting pile of past-due bills. They point to evidence the economy remains in fundamentally solid shape, with historically low unemployment and price increases finally slowing.
“Jobs are strong and incomes are rising. So this isn’t an economywide story,” said Joe Brusuelas, chief economist at RSM. “But that strength is masking financial stress going on down-market.”
Lower-income borrowers caught in the pinch are resorting to some desperate measures. Some are leaning on credit cards to hold their finances together. There are 70 million more credit card accounts open now than there were in 2019, and Americans’ total credit card debt just topped $1 trillion for the first time, according to the New York Fed.
Another red flag: Shoppers are turning to buy now, pay later services to cover necessities such as groceries. Usage surged 40 percent in the first two months of 2023, according to data from Adobe Analytics.
Major retailers are starting to take note, reporting in their second-quarter results this month that delinquency rates on private-label credit cards are on the rise. Executives at Macy’s, Nordstrom and Kohl’s noted the shortfalls are hurting revenue.
Adrian Mitchell, Macy’s chief operating and financial officer, told investors last week that while the company expected delinquencies to climb in the second quarter, the rate of increase “was faster than planned.” The retailer’s revenue declined $84 million year-over-year to $120 million.
“I think the credit card revenue is an indication of some of the pressures that we’re actually seeing on the consumer,” Mitchell added.
Chief financial officers at Kohl’s and Nordstrom also said they anticipated payment drops and noted they’re now on par with pre-pandemic levels. Cathy R. Smith at Nordstrom told investors that while the retailer’s customer tends to be a “higher quality credit consumer” and “more resilient,” the steady declines could be a “precursor for higher credit losses in the future.”
While inflation has moderated in recent months and consumer spending remains strong, prices of essential goods remain considerably higher than they were pre-pandemic. Americans are continuing to trim discretionary spending or trading down to off-price and discount retailers. The U.S. Census Bureau’s July retail sales report showed that while sales were boosted by online shopping — thanks in large part to Amazon Prime Day — spending at department, electronics and furniture stores declined. (Amazon founder Jeff Bezos owns The Washington Post. Interim Post CEO Patty Stonesifer sits on Amazon’s board.)
After inflation made everything more expensive, the interest rate increases enacted to fight those rising prices increased the cost of debt. With that combination, some consumers suddenly found themselves living beyond their means and unable to repay their debt, experts said.
“People don’t like going into default or delinquency with credit cards — it makes a lot of people feel very nervous and unhappy,” said Neil Saunders, managing director for retail at analytics company GlobalData. “It underlines how much some consumers are under pressure; and it’s one of the cracks that’s appearing in the consumer economy.”
Credit card delinquencies will continue to rise in the second half of the year, he added. On top of rising interest rates and student loan repayments, higher energy and electricity bills in the fall and winter will add to some consumers’ debt loads.
“And that is before you even factor in the general cost of the holidays, which no one really wants to scrimp on,” Saunders said. “So I think there are some real pressures building there for the consumer.”
Delinquencies on auto loan payments, which have already hit rates last seen during the financial crisis of the late 2000s, are also likely to keep climbing, credit experts said. The situation is even worse for borrowers with bad credit, whose loans are considered “subprime” in Wall Street parlance. During the financial crisis, 5 percent of those subprime borrowers were 60 days or more past due on their loans; that number today stands at close to 7 percent, according to data from Equifax.
Lenders quote them higher interest rates because they carry a greater risk of default. And those borrowers tend to be less wealthy to begin with, meaning low and middle-income individuals can be stuck with larger monthly payments for the same car.
Yet consumers have to take on more debt to buy a car than they did a few years ago because prices surged during the pandemic and have remained elevated. The average price of a new vehicle in July was about $48,300, up from $37,700 four years ago, according to Cox Automotive. The average used car listed for $27,000, up from $19,400 four years ago.
Meanwhile, new loan delinquencies are continuing to accelerate and unlikely to peak until next year, according to a report this month from Moody’s Investor Service.
“We’ve sped way past normal,” Mike Brisson, a senior economist at Moody’s Analytics, said in a recent webcast, calling the elevated delinquencies “very concerning.”
Several lenders suffered financial losses in the latter half of 2022 when auto prices briefly fell, said Jeremy Robb, senior director of economic insights at Cox Automotive.
“Now, with everything increasing in price, it’s just harder and harder for customers to get a loan or want a loan at the interest rate offered,” Robb said. “There’s just much less risk tolerance in the auto loan space.”