More than ten percent of credit card debts are over 90 days overdue. Banks will restrict lending.
This is a second look at some interesting charts from the New York Fed’s quarterly report on household debt and credit.
Over 10 percent of credit card debt is serious arrears
Severe car loan arrears by age
Severe credit card arrears by age
Lenders took higher risks
The Consumer Financial Protection Bureau (CFPB) reports that credit card delinquencies are higher than in 2019 because lenders have taken on greater risks.
After declining during the pandemic, the share of consumers with a credit card in default has risen sharply since 2021 and is now higher than in 2019. While consumers in default show clear signs of difficulty, the rising delinquency rate has been interpreted in news reports as a sign that financial difficulties are becoming more widespread, suggesting underlying weakness in the U.S. economy. We show that this increase in delinquencies is not a sign of more general difficulties but can be explained by a significant increase in the riskiness of recently issued credit cards.
Delinquencies were concentrated on credit cards issued in recent years, and we show that these credit cards were much riskier than in previous years. Two factors explain this additional risk: First, lending standards were relaxed somewhat in 2021 and 2022, as evidenced by a decline in credit scores at origination. At the same time, pandemic relief and forced savings drove average credit scores up sharply. By not significantly tightening lending standards, lenders effectively issued cards with a much lower range of risk. We show that this changed risk composition explains why delinquencies are higher than in 2019.
Overall delinquencies have risen sharply in recent years as credit cards from 2021, 2022 and 2023 went delinquent much faster than credit cards from other years. About 8 percent of credit cards from 2016 went delinquent about four years after issuance. Meanwhile, the 2021 vintage reached an 8 percent delinquency rate after just two years, while the 2022 vintage reached 8 percent after less than two years, and 2023 has so far followed closely behind 2022. (The 2020 vintage falls between the pre- and post-pandemic vintages, reaching an 8 percent delinquency rate after 3 years.) At the same time, credit cards from earlier years have not seen a similar increase in delinquencies in recent years.
Cards from 2021 to 2023 were riskier than before
Figure 3 (image above) shows the credit scores of new credit cards issued each month and the average credit score of all consumers on the left axis. During the Great Recession, lending standards tightened greatly, so that consumers with a new credit card had average scores above 720, even though the average credit score of all consumers was about 690. As a result, the average credit score of consumers with a new credit card was above 55 percent from 2008 to 2014, as shown on the right axis of Figure 3. A consumer’s credit score is the percentage of all consumers with a score who have a lower score than that consumer.
Credit crunches are increasing, while layoffs are increasing and it is becoming much more difficult to find a new job if you lose your job.
The fact that newer loans are defaulting more quickly suggests that renters and Generation Z are the most affected.
But it’s not just Millennials and Zoomers who are affected. Payment delinquencies are increasing across all age groups, except for those 39 and younger.
Recession debate
On August 9, I talked about why things are worse than they look.
If you missed it, please read Recession debate: Greg Ip of the WSJ invokes the Sahm rule and says there is no recession
Recessions often begin with positive employment growth and positive industrial production.
And the number of jobs is most likely greatly overstated. My calculations on upcoming negative revisions are similar to those of Bloomberg’s chief economist.
For more information, see Expect the BLS to revise job growth downward by 730,000 in 2023, and even more this year
If you think the number of jobs is high, you are completely wrong.
