Defaults on credit cards and auto loans are at a 10-year high as inflation squeezes households

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by Lisa Fincher

September 4, 2023 | 4:16 p.m

Inflation-stricken Americans are defaulting on their credit cards and auto loans at levels not seen since the financial crisis – and the struggle to pay their bills will only get worse as interest rates rise and the moratorium on student loans expires.

Low- and middle-income earners have been hit particularly hard by rising prices on everything from rent, groceries, and new and used cars despite the Fed’s attempts to rein in stubbornly high inflation.

This year, the delinquency rate on credit cards was 3.8%, while 3.6% defaulted on car loans, according to credit agency Equifax.

Both numbers are the highest in more than 10 years.

Mark Zandi, chief economist at Moody’s Analytics, told The Washington Post, “The increase in defaults and defaults is symptomatic of the difficult decisions these families have to make now — whether to pay their credit card bills, rent or Buying groceries. mail.

And with any savings from government stimulus checks depleted in the era of the pandemic, many long-standing borrowers have turned to opening new lines of credit — even with the average interest rate at a record 20.6%, according to Bankrate.com — to try to pay off their debts. .

There are now 70 million more credit card accounts open than before the pandemic in 2019, and credit card debt has topped $1 trillion for the first time ever, this year according to the New York Federal Reserve.

“We’ve quickly outgrown normal,” Mike Bryson, chief economist at Moody’s Analytics, said in a webcast, and cited the rise in defaults as “very worrying,” according to a Washington Post report.

Credit card interest rates could rise further as the Federal Reserve considers raising the interest rate again at the end of the month to bring inflation down to its target rate of 2% – from the current 3.5%.

Vulnerable individuals already struggling with rising rents and grocery prices will need to start making student loan payments next month after their debt has been paused for more than three years.

The pain felt by consumers could be a positive sign for Fed policymakers as they seek to head off a recession with a much-publicized “soft landing,” according to financial experts.

“The Fed might look at this and say that’s the whole purpose of raising rates, to make it more difficult” to make purchases, Torsten Slok, chief economist at Apollo Global Management, told The Washington Post.

However, as the holiday season approaches, industry experts are also concerned that consumers will run up more debt as well as rising energy bills, especially as cold weather sets in and the cost of heating homes rises.

Retailers, including Macy’s, Kohl’s and Nordstrom, have also reported higher delinquency rates among their customers with special store cards.

Macy’s admitted that its store’s card delinquency rates were rising “faster than planned,” Adrian Mitchell, the company’s chief operating officer, said in an August earnings call.

Other retailers, such as Foot Locker, blamed the disappointing financial results on “consumer weakness”.

“People don’t like to default or be late on credit cards — it makes a lot of people very stressed and unhappy,” Neil Saunders, managing director of retail at analytics firm GlobalData, told The Washington Post.

“It highlights just how stressed some consumers are, which is one of the cracks that is showing in the consumer economy.”