In this photo illustration, Visa, Mastercard and American Express logos on various credit and debit cards next to one dollar bills in Somerset, UK January 4, 2025.
Anna Buckley | Getty Images
As consumer pressure mounts, the proportion of credit card holders paying only the minimum repayment is rising. Philadelphia Fed Report.
In fact, data from the third quarter of 2024 shows that the proportion of active cardholders who make benchmark payments solely by credit card jumped to a 12-year high.
During that time, the level rose to 10.75%, part of an ongoing trend that began in 2021 and accelerated as average interest rates soared and delinquency rates accelerated. The increase also marks a series high for the data set that began in 2012.
As minimum payments have trended higher, delinquency rates have also risen.
The proportion of cardholders who are overdue for more than 30 days increased from 3.21% to 3.52%, an increase of more than 10%. That’s also more than double the pandemic-era low of 1.57% set in the second quarter of 2021.
The news counters the common narrative healthy consumer They have continued to spend even though inflation hit a more than 40-year high in mid-2022 and has remained above the Fed’s 2% target for nearly four years.
signs of strength
To be sure, there are still plenty of positive signs. Although delinquency rates have risen, they are still well below the 6.8% peak during the 2008-09 financial crisis and have not yet become severely stressed.
“There are still a lot of unknowns. We’ve seen over the past few days how quickly things can change,” said Elizabeth Renter, senior economist at personal finance company NerdWallet. “The base case is that consumption across the economy will remain strong.”
Goldman Sachs said consumer spending rose 2.9% year-on-year in November after adjusting for inflation, noting on Tuesday that consumers are seen as a “source of strength” for the economy. The firm estimates that consumer spending will slow in 2025 but still grow at a healthy 2.3% real rate, and Goldman believes delinquency rates are showing signs of leveling off.
However, if solid trends in consumer spending continue, it will face some daunting headwinds.
The average credit card interest rate climbed to 21.5%, about 50% higher than three years ago. According to data from the Federal Reserve. Investment Encyclopedia Make the average interest rate higheraccounting for 24.4%, noting that so-called low-cost cards issued to borrowers with poor or no credit history have exceeded 30%. Consumers are getting no help from the Fed: Even though the central bank Lower base interest rates Last year, credit card costs remained high by a full percentage point.
Those rates are reaching higher balances, with revolving credit arrears swelling to $645 billion, a 52.5% increase since hitting a decade low of $423 billion in the second quarter of 2021, according to the Philadelphia Fed.
Renter noted that an increasing number of respondents (currently 48%) are dissatisfied with the company’s own consumer research Credit cards were reportedly used to purchase essential items. Additionally, NerdWallet’s survey found even higher levels, around 22%, saying they only make minimum payments.
According to NerdWallet, the average credit card balance is $10,563, which would take 22 years and cost $18,000 in interest if you paid only the minimum amount.
“As prices rise, people will use credit cards more to buy necessities. If interest rates rise, your life becomes more difficult,” Lunt said. “If they only make the minimum payment, you can go from barely getting by to drowning very quickly.”
Trends in this direction are not encouraging. A recently released New York Fed December Survey The average perceived chance of failing to make minimum debt payments in the next three months was 14.2%, unchanged from September and the highest level since April 2020, the study found.
Home loans slow
It’s not just credit cards that families are feeling the pinch.
Mortgage originations also hit a 12-year low in the third quarter, according to a report from the Federal Reserve Bank of Philadelphia. After peaking at $219 billion in the third quarter of 2021, originations three years later were just $63 billion.
“Consumers locked into low fixed-rate mortgages have little incentive to refinance amid higher mortgage rates, reducing mortgage demand,” the central bank branch said in a report.
In addition, the home loan debt-to-income ratio has also increased, recently reaching 26%, which is 4 percentage points higher than in the past five years.
Typical 30-year mortgage rates have recently surged above 7%, creating another hurdle for housing and homeownership.
