Total household debt in the U.S. increased by $16 billion, reaching $17.06 trillion in the second quarter of 2023, according to the Federal Reserve Bank of New York. Credit card balances, consumer loans, and auto loans are at record-high levels, and are causing concern about the U.S. consumer-driven economy among economists and financial analysts.
Credit Card Balances Hit Record High
Credit card balances exhibited the most significant deterioration in performance among debt categories this quarter, reaching a milestone of $1.03 trillion. This marks the first time credit card balances have surpassed $1 trillion in nominal terms.
“Credit card balances saw brisk growth in the second quarter,” said Joelle Scally, Regional Economic Principal at the New York Fed.
Credit card balances have been rising, with seven consecutive quarters of year-over-year growth, and the second quarter of 2023 witnessed a surge of 16.2% compared to the previous year, further reinforcing this trend.
Borrowers with excellent credit scores, specifically those above 760, have had greater approval odds during the first half of 2023 than subprime borrowers. This tightening trend aligns with the June 2023 SCE Credit Access Survey findings, which revealed a rise in credit application rejection rates, particularly among those with lower credit scores. The overall rate of credit application rejections rose to 21.8% and was most pronounced among individuals with credit scores below 680.
Auto Loan Delinquencies Accelerating
Auto loan balances increased by $20 billion to $1.58 trillion, maintaining the upward trend observed since 2011. The volume of new auto loans, which also includes leases, reached $179 billion, mostly due to the high dollar values of the loans.
A significant factor underlying the initial increase in inflation rates was car prices. At the end of 2019, the average new auto loan was about $17,000, but that amount snowballed through the pandemic, peaking at nearly $24,000 in the fourth quarter of 2022.
In June 2023, the rejection rate for auto loans rose to 14.2%, marking a new high as the share of auto loan delinquency debt increased by 0.4%.
Housing Debt a Bright Spot
New foreclosures have remained low despite the national lifting of foreclosure moratoria. About 34,000 individuals have recently experienced foreclosure notations on their credit reports.
A significant cause is the pandemic refinancing boom, reports the Federal Reserve Bank of New York. Homeowners who took advantage of historic low interest rates by refinancing in 2020 and 2021 are poised to enjoy affordable financing costs for many years.
These borrowers, known as “rate refinance” borrowers, successfully reduced their monthly mortgage payments, enhancing their cash flow. Also, “cash-out” borrowers have leveraged the equity in their real estate assets, enabling them to access additional cash for consumption.
About 5 million borrowers accessed $430 billion in home equity through cash-out refinancing. In parallel, approximately 9 million individuals refinanced their loans without extracting equity, leading to a decrease of $24 billion per year in their overall housing expenses.
Young Americans Under Increased Financial Stress
The percentage of newly delinquent debt has risen for both credit cards and auto loans. Evidence suggests that higher prices and interest rates are the primary factors behind this delinquency increase. The delinquency rates are higher for younger borrowers as compared to older borrowers.
The Federal Reserve’s persistent efforts to curb inflation — which reached a 40-year high in 2022 — propelled rates to unprecedented levels. In July, the central bank raised its key lending rate for the 11th time since March 2022. This quarter-point hike pushed the benchmark rate to a target range of 5.25% to 5.50% — its highest point in 22 years. Consequently, these increases in the federal funds rate have had a cascading effect on credit card annual percentage rates (APR), auto loans, and mortgages.
This is particularly problematic for younger borrowers, who are more likely to have federal student loans still in administrative forbearance. Outstanding student loan debt stood at $1.595 trillion by the end of 2022. Federal student loan payments remain suspended until October 2023.
Some of these borrowers face difficulties meeting their credit card and auto loan charges, even though they are currently not required to pay on their student loans. When payments on these loans resume later this year, millions of younger borrowers will have to manage an additional monthly expense, potentially leading to further escalation in delinquency rates.
Americans are experiencing rising prices in various areas, including purchases made with credit cards, grocery expenses, fuel costs, and other goods. It is plausible that the escalating prices and resulting debt service payments are negatively impacting borrowers’ financial positions and making it more challenging to meet their financial obligations, especially considering the decline in real disposable income in 2022.
Since consumer spending is a critical component of the U.S. Gross Domestic Product, an uptick in delinquency rates as individuals attempt to manage debt payments with fewer financial resources could prove disastrous.
This article was produced by Media Decision and syndicated by Wealth of Geeks.