US credit card defaults jump to highest level since 2010

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Defaults on U.S. credit card debt reached the highest level since the 2008 financial crisis, a sign that the financial health of low-income consumers is eroding after years of high inflation.

Credit card lenders wrote off $46 billion in loan balances in the first nine months of 2024, up 50 percent from the same period a year earlier and the highest level in 14 years, according to industry data compiled by BankRegData. Write-offs, which occur when lenders decide it is unlikely that a borrower will make good on their loan, are a closely watched measure of significant credit crunch.

“High-income households are doing OK, but the bottom third of US consumers has been tapped out,” said Mark Zandi, head of Moody’s Analytics. “Their savings rate is now zero.”

The sharp rise in defaulted loans is a sign of how consumers’ personal finances are increasingly stretched over the years. High inflationAnd the Federal Reserve has left borrowing costs at high levels.

Banks are yet to report their fourth-quarter numbers but early signs are that more customers are falling significantly behind on their dues. Capital One, the third-largest U.S. credit card lender behind JPMorgan Chase and Citigroup, recently said its annual credit card write-off rate, which is the percentage of its overall loans that are marked as non-performing, as of November was 6.1 percent per cent, one year. An increase of 5.2 percent over the previous period

“Consumers’ spending power has declined,” said Odysseus Papadimitriou, head of consumer credit research firm WalletHub.

US consumers are coming out of pandemic-era lockdown with cash and ready to spend. Credit card lenders are happy to help, signing up customers who may not have qualified based on income in the past, but look like safe debtors because they have cash in their bank accounts.

Credit card balances rose, rising by a combined $270bn in 2022 and 2023, pushing total US consumer credit card debt above $1tn for the first time in mid-2023.

That cost, along with coronavirus-induced supply chain disruptions, drove up inflation, prompting the Fed to raise borrowing costs starting in 2022.

High balances and interest rates have left Americans who can’t pay their credit card bills in full paying $170 billion in interest over the past 12 months ending in September.

This has siphoned off some of the excess cash in consumers’ bank accounts, especially low-income consumers, and as a result, many of these borrowers are struggling to pay off their credit card debt.

Expect the U.S. central bank to cut interest rates sharply in 2025 this year after cutting last week, when officials only predicted Half a percentage point A rate cut next year compared with a 1 percentage point forecast three months ago.

In a sign of how consumers are still struggling after nearly $60 billion in consumer credit card debt was written off last year, another $37 billion remained on consumer cards that were at least one month past due.

The credit card delinquency rate, seen as a precursor to write-offs, peaked in July, according to data from Moody’s, but is down slightly and about one percentage point higher than the average for the year before the pandemic.

“Criminals point to more pain ahead,” said WalletHub’s Papadimitriou.

Donald Trump’s threat of sweeping tariffs, which could raise inflation and interest rates, “will be two troubling issues for consumers in 2025”, he added.