Delinquency Is Increasingly in the Cards for Maxed‑Out Borrowers

[brooklynite]

This morning, the New York Fed’s Center for Microeconomic Data released the Quarterly Report on Household Debt and Credit for the first quarter of 2024. Household debt balances grew by $184 billion over the previous quarter, slightly less than the moderate growth seen in the fourth quarter of 2023. Housing debt balances grew by $206 billion. Auto loans saw a $9 billion increase, continuing their steady growth since the second quarter of 2020, while balances on other non-housing debts fell. Credit card balances fell by $14 billion, which is typical for the first quarter. However, an increasing number of borrowers are behind on credit card payments. In this post, we explore the relationship between credit card delinquency and changes in credit card “utilization rates.”

The nationwide aggregate credit card utilization rate—that is, what share of the aggregate credit limit is being used—was about 23 percent last quarter, on par with previous quarters. However, the utilization rates of individuals differ widely: 52 percent of borrowers were using less than 20 percent of their available credit in the first quarter, while 18 percent of borrowers were using at least 90 percent of their available credit (19 percent were between 20 and 60 percent utilization, and 11 percent were between 60 and 90 percent). Here, we focus on the share of borrowers using 90 percent or more of their credit limit, whom we refer to as “maxed-out borrowers,” and how likely they are to miss credit card payments.

For all debt outside of student loans, delinquency has been steadily rising since the fourth quarter of 2021 after historic lows during the COVID-19 pandemic. Credit card delinquencies, in particular, have risen past pre-pandemic levels. Will this trend continue, or are we likely to see a leveling off or even a reduction in credit card delinquencies?

Missed credit card payments are caused by many factors, ranging from forgetfulness to cash flow constraints and income loss. Most of these are difficult to predict or observe in individual-level credit data; however, one observable factor that is strongly correlated with future delinquencies is a high credit card utilization rate. While borrowers who were current on all their cards in the first quarter of 2024 had a median utilization rate of 13 percent in the previous quarter, those who became newly delinquent had a median rate of 90 percent. This makes sense, since using practically all of your available credit could indicate a tight cash-flow situation. Indeed, credit utilization is a key input in credit scores, which are intended to measure the probability of future default.

https://libertystreeteconomics.newyorkfed.org/2024/05/delinquency-is-increasingly-in-the-cards-for-maxed-out-borrowers/

[OAITW r.2.0]

1. That sucks...but that's the life a lotta people want to live.