High inflation "squeezes" bottom-tier consumers, U.S. credit card default rate hits a 14-year high
The credit card loan default rate in the United States has reached its highest level since the financial crisis, indicating a deterioration in the financial condition of low-income consumers. In the first three quarters of 2024, credit card lenders wrote off $46 billion in severely delinquent loan balances, an increase of 50%. High-income households are in good condition, but the bottom third of consumers have a savings rate of zero. The Federal Reserve's interest rate hikes have led to an increase in credit card interest rates, weakening consumers' purchasing power
According to the Zhitong Finance APP, the default rate on credit card loans in the United States has reached its highest level since the financial crisis, indicating that the financial situation of low-income consumers is deteriorating after years of high inflation.
According to industry data compiled by BankRegData, credit card lenders wrote off $46 billion in severely delinquent loan balances in the first three quarters of 2024, a 50% increase from the same period last year, marking the highest level in 14 years. Write-offs occur when banks expect they will not be able to recover debts, also known as net charge-offs, which is a closely watched indicator of significant loan distress.
Mark Zandi, chief economist at Moody's Analytics, stated, "High-income households are doing well, but the bottom third of consumers in the U.S. are exhausted. Their current savings rate is zero."
As the default rate rises, escalating inflation and rising credit costs are putting consumers' finances under pressure. To combat soaring inflation in 2021 and 2022, the Federal Reserve raised the benchmark interest rate by 525 basis points in 2022 and 2023. This indirectly increased the interest charged on credit cards for customers with balances.
Although the target range for the federal funds rate has been lowered to 4.25%-4.50%, which is 100 basis points lower than the peak of 5.25%-5.50% maintained for over a year, the Federal Reserve reduced its expectations for rate cuts in 2025 during its last meeting, predicting only a 50 basis point cut next year, down from the previous forecast of 100 basis points three months ago.
Currently, banks have not released data for the fourth quarter, but preliminary signs indicate that an increasing number of consumers are severely delinquent on their debts. Capital One, the third-largest credit card lender in the U.S., recently reported that as of November, its annualized credit card charge-off rate reached 6.1%, up from 5.2% a year ago.
Odysseas Papadimitriou, head of consumer credit research firm WalletHub, stated, "Consumers' purchasing power has weakened."
Additionally, according to Moody's data, the credit card delinquency rate, which is the proportion of credit card loans overdue by more than 30 days, peaked in July. Currently, this figure has only slightly decreased and remains nearly one percentage point higher than the average level before the pandemic.
The credit card delinquency rate is considered a precursor to net charge-offs.
Odysseas Papadimitriou from WalletHub stated, "Delinquent debts mean more pain is coming in the future." The tariff threats from former President Trump could exacerbate inflation and interest rates, "which are two issues consumers will face in 2025," he added