Credit card delinquency rises above three percent for the first time in over a decade

The Federal Reserve reported earlier this month that in late 2023, credit card delinquency rose above three percent for the first time since 2012. Credit card delinquency is one indicator of economic health and household well-being. Increases in delinquency typically indicate periods of economic hardship. During the Great Recession, credit card delinquency had surpassed nine percent as workers lost their jobs and looked towards their credit cards to cover basic costs in an unstable economy. The increase seen now is driven by a comprehensive set of factors, with inflation and its destructive impact on purchasing power being just one of many. Over the same period, the average household spent ten percent of their income on debt payments. While this figure may seem low considering that mortgages would be included in this figure, it is essential to keep in mind that a third of adults in the US do not own the home they live in.

Previously, the Fed had pointed out how increased credit card delinquency contributed to higher levels of financial distress at the household level. The Fed defines financial distress as having an “account that is 30 days or more past due, excluding severe derogatory debt (more than 120 days past due).” Looking at credit card debt in particular, the Fed found that financial distress was higher than pre-pandemic levels, with 3.87 percent of households finding themselves in this position. This rate is much lower than the forty-eight percent that carry a balance, even for a short period, each month on their credit card.

For younger workers, the situation is tough. Analysts at the New York Fed report that “while Baby Boomers (born 1946-64), Generation X (born 1965-79), and Generation Z (born 1995-2011) credit card users have delinquency rates similar to their pre-pandemic levels and trends, Millennial (born 1980-94) credit card users began exceeding pre-pandemic delinquency levels in the middle of last year.” Since mid-2023, the delinquency rate for Millienails has increased from 2.5 percent in the third quarter of 2019 to 2.9 percent in the same quarter in 2023. Although Millennials have seen their delinquency rate increase to the highest level, Generation Z has a higher average (3.1 percent).

An economy full of mixed messages

With the economy providing many mixed messages on its health, this indicator is of concern to economists who see increases in delinquency as a sign that households cannot keep up with the continuing rise in the cost of living. While inflationary pressure for many goods and services has softened over the last eighteen months, housing costs continue to increase the Consumer Price Index (CPI). As this essential cost rises, some households use their credit cards to make it through the month. Additionally, the Personal Savings Rate, captured by the Bureau of Economic Analysis, reported that savings had increased slightly from $651 billion to 766 billion compared to a year prior. As a percentage of disposable income, these amounts equal 3.4 percent and 3.7 percent, respectively. While the personal savings rate captured in December was higher than that seen a year prior, it had fallen since March.