Credit card losses, which occur when a borrower fails to repay debt and the lender writes it off, are rising at the fastest rate since 2008, according to Goldman Sachs. They currently stand at a rate of 3.63%, an increase of 1.5 percentage points from lows seen in September 2021. Goldman expects it to reach 4.93%, peaking either in late 2024 or early 2025.
Silver said it’s due to the convergence of two factors: higher interest rates from the Federal Reserve and a surge in spending since the pandemic.
While the share of losses to total debt is still historically low, Americans do hold record-high credit card debt of more than $1 trillion, according to the Federal Reserve Bank of New York.
Holiday spending from November 1 to December 24, excluding car sales, is expected to increase 3.7% year-over-year, according to Mastercard SpendingPulse.
During a press conference earlier this month, Federal Reserve Chair Jerome Powell acknowledged interest rates hikes cause more pain for people who rely on credit cards, and that he and his colleagues are keeping an eye on consumer distress.
“Measures of distress among consumers were at historic lows quite recently, you know, during and after the pandemic. They’re now moving back up to normal. We’re watching that carefully. But at this point, these readings are not at troublingly high levels. They’re just kind of moving back up to what was typical in the pre-pandemic era,” Powell said.
Protecting the economy, Silver pointed out, are the strong job market and wage growth.
Mortgage delinquency rates for single-family homes have been declining since the end of 2020, according to data from the Federal Reserve Bank of St. Louis. The level of new auto loans delinquencies, however, rose above pre-pandemic levels in the second quarter of this year to 7.3%, according to the Federal Reserve Bank of New York.
“As you see more and more people fall behind on these payments, you’re gonna see delinquencies rise across these categories and that could contribute to a big economic slowdown, if not a recession,” Silver said.
Another element of uncertainty is around the corner for about 40 million federal student loan borrowers, as payments resume next month.
“The average student loan payment per month is around $350,” Silver said. “If you think about that is not gonna be available for discretionary spending or for paying down debt, that could contribute to the problem even more.”