U.S. credit card defaults hit highest level since 2010

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Defaults on credit card loans in the United States have reached their highest level since the 2008 financial crisis, a sign that the financial health of low-income consumers is deteriorating after years of high inflation.

Credit card lenders wrote off $46 billion in seriously delinquent loan balances during the first nine months of 2024, up 50% from the same period a year earlier and the most high for 14 years, according to industry data compiled by BankRegData. Charge-offs, which occur when lenders decide a borrower is unlikely to repay their debts, are a closely watched measure of significant loan distress.

High-income households are doing well, but the bottom third of U.S. consumers are under strain, said Mark Zandi, director of Moodys Analytics. Their savings rate is currently zero.

The sharp rise in defaults reflects how consumers' personal finances are increasingly strained after years of high inflation and the Federal Reserve leaving borrowing costs at high levels .

Banks have yet to release their fourth-quarter figures, but early signs indicate that more consumers are falling significantly behind on their debt payments. Capital One, the third-largest credit card lender in the United States after JPMorgan Chase and Citigroup, recently said that as of November its annualized credit card cancellation rate, which is the percentage of its overall loans marked as unrecoverable, had reached 6.1 percent. percent, up from 5.2 percent a year ago.

Consumer purchasing power has declined, said Odysseas Papadimitriou, director of consumer credit research firm WalletHub.

American consumers have emerged from pandemic-imposed lockdowns with plenty of money and ready to spend. Credit card lenders were happy to help, signing up customers who might not have qualified in the past based on their income, but who looked like safe debtors because their bank accounts were flush with cash.

Credit card balances have skyrocketed, increasing a total of $270 billion in 2022 and 2023, and pushing total U.S. consumer credit card debt above $1 trillion for the first time. times in mid-2023.

This spending, along with coronavirus-induced supply chain bottlenecks, has led to a burst of inflation, prompting the Fed to increase borrowing costs starting in 2022.

Higher balances and interest rates have forced Americans who can't pay their credit card bills in full to pay $170 billion in interest over the past 12 months ending in September.

This has absorbed some of the excess cash that was sitting in consumers' bank accounts, particularly those of lower-income consumers, and as a result, more of these borrowers are struggling to repay their card debts credit.

Hopes that the U.S. central bank would quickly cut interest rates in 2025 after this year's cuts were dashed last week, when officials forecast just half a percentage point rate cut next year, compared with a forecast of one percentage point three months earlier.

In a sign of consumers' struggles, even after canceling nearly $60 billion in consumer credit card debt over the past year, another $37 billion remains on consumers' cards that are at least overdue. least a month.

Credit card delinquency rates, considered a precursor to charge-offs, peaked in July, according to Moodys data, but have fallen only slightly and remain nearly a percentage point higher than they were on average in the year before the pandemic.

The unpaid debts portend further difficulties to come, WalletHubs Papadimitriou said.

US President-elect Donald Trump's threat of large-scale tariffs, which could raise inflation and interest rates, would pose two problems for consumers in 2025, he added.

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