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The warning signs are flashing. American consumers are struggling with credit card debt. The impact could be wide-ranging — even affecting people who keep up with their payments.
One particular warning sign that's getting more urgent is the credit card delinquency rate. This measures the percentage of credit card bills past their due dates.
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The Federal Reserve Bank of New York's Household Debt and Credit Report shows that as of the second quarter of 2024, the percentage of credit card balances that are 90 days or more overdue is the highest it has been since the first quarter of 2012. That was back when the economy was still recovering from the Great Recession.
Late payments are rising, which is no surprise. According to the same New York Fed report, total credit card debt is at an all-time high, having risen by more than 45% in just three years. Federal Reserve figures show the average interest rate charged on credit cards has jumped by nearly 7% since mid-2020. Consumers have taken on a record amount of credit card debt at the wrong time, resulting in bigger credit card bills.
Related: Almost 40% of Americans Don’t Know About This Fast Way to Pay Down Credit Card Debt.
When someone can't pay a credit card bill on time, it has immediate negative effects. That person will likely incur late fees and interest penalties that add to their financial burden. Their credit score will probably take a hit, making future borrowing more expensive.
Those are all serious problems, but the impact extends beyond the individual credit card customers who are late paying their bills. When delinquency rates on credit cards rise, it can be an early warning sign that credit card default rates will also rise. Delinquency rates represent late payments. Default rates represent people who fail to pay their bills.
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Credit card delinquencies and defaults both cost credit card companies money. When delinquency and default rates rise, credit card companies try to reduce their risk by tightening their lending standards. That can make credit harder to get and more expensive for more consumers.
That's why the recent rise in credit card delinquencies is a sign for all consumers to take steps to protect themselves, even if they haven't yet missed a payment.
How rising credit card delinquencies could affect you
As much as credit card delinquency rates have risen over the past few years, history suggests they could get a lot worse.
Based on data from the Household Debt and Credit Report, the percentage of credit card balances that are 90 or more days overdue has risen in four consecutive calendar quarters, to reach 10.93%.
A 10.93% delinquency rate means that nearly one out of every nine dollars owed to a credit card company is seriously overdue. When large numbers of people don't pay their bills on time, credit card companies can respond in a few different ways:
- Accepting fewer applicants for new credit card accounts
- Cutting existing credit limits
- Raising interest rates, especially for higher-risk customers
Kevin Shahnazari, founder of FinlyWealth, a website offering financial advice and tools, says credit card companies are already becoming more cautious. "Card companies are battening down the hatches amid skyrocketing delinquency levels. In the second quarter of 2024, a significant 25% increase in rejections of credit applications was experienced over the same period last year."
A Federal Reserve survey of senior loan officers confirms that banks generally have been tightening lending standards on credit cards for several months now. Those standards could get even tighter if delinquency rates continue to rise.
The peak level of credit card balances 90 or more days overdue was 13.74%, in the second quarter of 2010. Could things get that bad again?
Back when delinquency rates peaked in the second quarter of 2010, the unemployment rate was well over 9%, as opposed to just 4.1% now, according to figures from the Bureau of Labor Statistics.
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On the other hand, the average credit card interest rate back then was just 14.48%, as opposed to 22.76% now. That means that it has become a lot more expensive to carry a credit card balance.
The key may be whether the job market remains strong. As Austin Kilgore, an analyst at Achieve, a digital personal finance company that helps people manage their debt, points out, "the increase in credit card delinquencies is happening at a time when wages and the overall economy have been growing. If macro-economic conditions start to worsen, the added strain on consumers would likely lead to even higher credit card delinquencies," he says.
If that happens, credit card customers with low credit scores will likely be most affected. Even if you pay your credit card bills on time, a low credit score would cause credit card companies to view you as a high risk in a weak economy. That may mean lower credit limits and higher interest rates.
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Customers who are late paying their credit card bills risk having their accounts canceled. Even if they've gotten away with late payments in the past, in a weak economy, credit card companies will have less tolerance for customers who represent a high risk of defaulting on their debt.
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How can you protect your credit in this environment?
With credit card delinquency rates rising, you need to protect your access to credit. Here are some things to try:
- Take extra care to pay your credit card bills on time. Consider automated payments or other systematic reminders.
- If you have to be late with a payment, be proactive about contacting the credit card company to let them know when to expect payment.
- Take steps to improve your credit score, such as reducing balances, paying all accounts on time and being very selective about applying for new credit.
- Reduce your dependence on credit card debt. Not only should reducing balances help your credit score, but borrowing less could prepare you to make ends meet with less access to credit.
Credit card delinquencies are not yet at their highest levels ever. However, they are quickly heading in that direction. Be prepared for this to impact how you use credit.
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