Credit Delinquencies Hit 15-Year High Amid Rising Unemployment, Lenders Warn
America’s economy has led the way in the post-pandemic recovery, but can it handle tougher times ahead? After 17 months of raising interest rates, the Fed is set to start cutting them later this week. However, the fight against inflation has exposed cracks in the economic foundation, and now Americans are falling behind on bills.
Put it on plastic: While affluent residents continue to boost the economy, the bottom half of earners face mounting challenges. According to the NY Fed and Equifax, credit card and auto loan delinquencies hit 15-year highs in Q2 2024, with 9% of credit card balances and 8% of auto loans more than 30 days late. Along with weaker consumer demand, a cooling labor market, and stagnant corporate revenues, it signals that something may be off with the economy.
- Americans have increasingly relied on credit cards as the pandemic-era stimulus has dried up, with year-over-year card balances growing by 11%, according to the NY Fed.
- Last week, auto lender Ally warned that defaults have worsened, exceeding expectations due to dramatic changes in the “employment picture” for many US citizens.
Reasons for Worry?
Many financial institutions benefited from bumper earnings during the pandemic but now face the aftermath of a weaker fiscal environment. Just as banks prepare to report their earnings in the coming weeks, Ally’s warning has left Wall Street on edge — and investors have responded.
- shares dropped 21%, while peers such as Bread Financial and Synchrony Financial fell 8% and 2%, respectively, after forecasting higher charge-offs through 2024.
- Citigroup CFO Mark Mason echoed this sentiment, noting that Citi has seen rising arrears and carried balances, though the numbers are “starting to crest.”
A credit consolation: Many of these fresh warnings from creditors come months after giants like JPMorgan Chase, Bank of America, and Discover warned that low-income Americans are feeling the brunt of the economic slowdown. Fortunately, we’re still far from the levels seen in 2009 — and relief may be on the horizon for borrowers as interest rate cuts and lower prices at restaurants and grocers begin to take effect.
