According to a Philadelphia Federal Reserve survey, consumer stress has increased, and a growing percentage of credit card users are merely paying the minimal amount due on their bills.
According to data through the third quarter of 2024, the percentage of active holders just paying baseline card payments has increased to a 12-year high.
As average interest rates have skyrocketed and delinquencies have also escalated, the level increased to 10.75% for the period, continuing a pattern that started in 2021. For a data set that started in 2012, the increase also represented a series high.
Delinquency rates increased in tandem with the minimum payment trend.
The percentage of cardholders who are past due by more than 30 days increased by more than 10%, from 3.21% to 3.52%. Additionally, it is more than twice as high as the delinquency rate that was at its lowest point during the pandemic, 1.57%, in the second quarter of 2021.
The report goes against the prevailing narrative of a strong consumer who has continued to spend even after inflation reached a 40-year high in the middle of 2022 and remained above the Fed’s 2% target for almost four years.
Signs of strength
Indeed, there are still a lot of encouraging indicators. Although the delinquency rate is increasing, it is still far below the peak of 6.8% during the 2008–2009 financial crisis and does not yet signal significant stress.
Many things are yet unknown. According to Elizabeth Renter, senior economist at personal finance startup NerdWallet, we’ve witnessed in recent days how swiftly things may be shifting. The general assumption is that consumers will continue to be robust across the economy.
According to Goldman Sachs, which said on Tuesday that it views consumers as a source of economic resilience, consumer spending increased 2.9% annually in November after accounting for inflation. Goldman anticipates delinquency rates leveling out, and the firm predicts that consumer spending will decline somewhat in 2025 but still expand at a robust 2.3% real rate.
But if the strong consumer spending trend continues, it will face some formidable obstacles.
According to Fed data, average credit card rates have increased to 21.5%, which is roughly 50% more than they were three years ago. The average rate is much higher, at 24.4%, according to Investopedia, which also notes that the use of so-called low-cost cards by borrowers with no or little credit history has increased to over 30%. The Fed hasn’t helped consumers: Credit card prices remained high last year despite the central bank lowering its benchmark interest rate by a full percentage point.
The Philadelphia Fed reports that money due on revolving credit has increased 52.5% to $645 billion since it touched a 10-year low of $423 billion in the second quarter of 2021, indicating that those rates are having an impact on considerably larger balances.
According to the renter, a growing percentage of participants in the company’s consumer survey—48% at this point—reported using credit cards for necessities. Furthermore, an even greater percentage—more like 22%—said they are merely paying minimal payments, according to the NerdWallet poll.
According to NerdWallet, paying the minimum amount on credit cards would take 22 years and result in $18,000 in interest, with average balances of $10,563.
People will use credit cards more frequently to pay for basics as prices rise. Renter claimed that when you add increased interest rates, it becomes harder to make ends meet. You might go from barely scraping by to drowning very fast if they’re only paying the minimum.
It is not a promising trend in that direction. The average perceived likelihood of missing a minimum debt payment over the next three months was 14.2%, tying with September for the highest since April 2020, according to a recent New York Fed study for December.
Home loans slow
Also, households are struggling with more than just credit cards.
According to the Philadelphia Fed study, mortgage originations also fell to a level not seen in over a decade in the third quarter. Originations are only $63 billion three years after reaching a peak of $219 billion in the third quarter of 2021.
According to the central bank branch’s research, individuals who have locked in cheap fixed-rate mortgages have little incentive to refinance when mortgage rates are high, which lowers demand for mortgages.
Additionally, house loan debt-to-income ratios are rising as well; they recently reached 26%, which is 4 percentage points greater than they were five years ago.
Another barrier to housing and homeownership is the recent rise in the average 30-year mortgage rate above 7%.
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