While the US economy is broadly healthy, pockets of Americans have run through their savings and run up their credit card balances after battling inflation for more than two years.
Experts worry that members of these groups -- mostly lower- and middle-income Americans, who tend to be renters -- are falling behind on their debts and could face further deterioration of their financial health in the year ahead, particularly those who have recently resumed paying off student loans.
“The US economy is currently performing better than most forecasters expected a year ago, thanks in large part to a resilient consumer," wrote Shernette McLoud, an economist with TD Economics, in a report issued on Wednesday.
"However, more recently that spending is increasingly being financed by credit cards.”
Americans held more than USD 1.05 trillion on their credit cards in the third quarter of 2023, a record, and a figure certain to grow once the fourth-quarter data is released by Federal Deposit Insurance Corp. Next month. A recent report from the credit rating company Moody's showed that credit card delinquency rates and charge-off rates, or the percent of loans that a bank believes will never be repaid, are now well above their 2019 levels and are expected to keep climbing.
These worrisome metrics coincide with the average interest rate on a bank credit card of roughly 21.5 per cent, the highest it's been since the Federal Reserve started tracking the data in 1994.
“Overall, the consumer is credit healthy. However, the reality is that there are starting to be some significant signs of stress,” said Silvio Tavares, president and CEO of VantageScore, one of the country's two major credit scoring systems.
Most analyses of Americans' financial health tend to tell a tale of two consumers. On one side are the roughly two-thirds of Americans who own their homes and those who've invested in the stock market and done substantially well. They generally had the savings cushion necessary to weather high inflation. Delinquency rates on single-family homes remain at near historic lows and home prices have continued to climb.
But for the rest of America, things are looking rough.
“You have these noticeable pockets of consumers -- mostly middle- and lower-income renters who have not benefitted from the wealth effect of higher housing prices and stock prices -- who are feeling financial stress and that's driving up these delinquency levels. They've been hit very hard by inflation,” said Warren Kornfeld, a senior vice president at Moody's, in an interview.
Kornfeld, who co-wrote a report last week looking at the climbing levels of delinquencies, expects them to keep climbing this year.
Consumers' financial health could play a big role in the 2024 election. President Joe Biden is running in part on his efforts to bring down costs for US families. Republicans counter that Biden is to blame for higher costs in the first place.
One way to gauge this bifurcation of the American economy is by looking at the results of some major credit card companies. The customers of Capital One, Discover Financial and Synchrony have historically been those with lower credit scores, while American Express typically serves the wealthiest and well-to-do.
At Synchrony Bank, the largest issuer of retail co-brand credit cards, the charge-off rate jumped from 3.5 per cent to 5.6 per cent in a year. Meanwhile, roughly 4.7 per cent of Synchrony customers are 30 days or more behind on their bills, which is also up from a year ago.
Discover's customers are carrying USD 102 billion in balances on their credit cards, up 13 per cent from a year earlier. Meanwhile, the charge-off rates and 30-day delinquency rates have climbed. Executives say they can see the impact of inflation.
“Think about a consumer that makes USD 50,000 a year,” said John Green, Discover's chief financial officer, at an investor conference in December. “When inflation outpaces your wage growth, they're making choices in terms of what they're going to spend, what bill they're going to pay and what they're going to frankly put on their table.”
Inflation peaked at 9.1 per cent in June 2022 and is now slightly above 3 per cent. But the costs of many goods and services remains elevated. A loaf of bread that cost USD 1.54 in December 2020 cost USD 2.02 at the end of last year, and a gallon of gas has risen from an average of USD 2.17 to USD 3.29 in the same timeframe, according to the Bureau of Labour Statistics.
Renters in particular have felt the pinch. The median rent for a property with up to two bedrooms has jumped from USD 1,424 at the end of 2020 to USD 1,713 at the end of last year, according to realtor.Com.
VantageScore's Tavares worries that the recent reintroduction of student loan payments could more acutely impact these customers in their ability to repay their debts.
“Folks are scrambling to pay these obligations that they haven't had to pay in three years, and it's hitting exactly the demographic we are talking about here: the younger folk, less affluent folk,” Tavares said.