Brace For Impact From Rising Debt Balances and Delinquencies

Last week, Goldman stated that credit card losses are rising at the fastest pace in almost 30 years — and they don’t expect “losses peaking until late 2024 / early 2025 for most issuers” like Capital One and Discover Financial Services. And in three of the past five cycles, growing losses of this magnitude were accompanied by recessions.

The pressure is on: Delinquency rates for consumer, credit and auto loans have soared in recent years — reaching their highest in over a decade and are expected to continue rising.

• In the summer, US credit card debt surpassed $1T for the first time, while average credit card interest rates have risen to 22.16% from 16.17% at the start of 2022.
• Since 2022, the cost of owning a new vehicle has risen 13.6% (~$1.5K) — making it harder to qualify for auto loans in recent months.

But the impacts have been felt disproportionately. Per the WP, nearly 7% of subprime (bad credit) borrowers are 60 days or more overdue on their loans — higher than the 5% during the great financial crisis — while subprime auto loan delinquencies are already above the levels during that same period.

Consumers have resorted to borrowing more in recent years, with 70M more credit card accounts opened than in 2019 — 69% of Americans having one, up from 65% four years ago.

What could derail the economy?

ING’s chief international economist thinks that by the second quarter of 2024, Americans will have used up all of their pandemic savings — worried that households that maxed out credit cards will find it harder to borrow more. And those refinancing from previously locked-in lower rates are going to face a sticker shock.

• Fidelity’s Salman Ahmed, who predicts a 60% chance of a recession in 2024, expects a wave of corporate debt refinancing over the next six months to hit the economy.
• “A company which financed itself at 2, 3, 4% is going to be financing at 10, 11, 12% now. That’s a huge shock.”

Forward-looking: T-minus six days until student debt holders are expected to make payments again. A recent survey by Jefferies’ consumer team showed that 90% of those with outstanding student debt are “at least somewhat concerned” about meeting monthly expenses (MW).