Why Credit-Card Delinquencies Are Soaring in America - and What It Means for You

When it comes to the financial health of American consumers, viral content produced by personal-finance influencer Caleb Hammer has highlighted a troubling trend. Hammer, who conducts "financial audits" of guests burdened with debt, has amassed nearly 2 million followers across TikTok and YouTube in just three years. His interviews, which often feature younger guests struggling to justify their reckless borrowing habits, have garnered significant attention for their mix of financial cautionary tales and real-time reactions.

Although Hammer’s subjects may represent extreme examples of financial mismanagement, they reflect a broader issue. Recent data from the Federal Reserve Bank of New York reveals a concerning uptick in serious credit-card delinquencies—defined as balances at least 90 days overdue. This figure surged to 11% in the final quarter of 2023, a jump of four percentage points over the past two years. This marks the highest delinquency rate in 13 years, a period when unemployment was double what it is today. Likewise, overdue debt on car purchases has also risen, climbing to a four-year high of 5%.

At first glance, these trends might raise alarm bells. Historically, delinquencies have served as early warning signs of broader economic distress, as they did before the 2007-2009 global financial crisis. However, the current rise in non-payment reflects a more complex picture—a divide not just between struggling borrowers but between lenders as well.

The Role of Rising Interest Rates

One major factor contributing to the rising delinquencies is the sharp increase in interest rates. The average credit-card interest rate has jumped from just under 15% in 2021 to over 21% today, the highest level in modern history. Unlike homeowners, who are shielded from immediate rate hikes due to long-term mortgage structures, credit-card borrowers feel the effects right away.

Who’s Struggling the Most?

The current surge in delinquencies is not evenly spread across all demographic groups. Instead, it is concentrated among a specific subset of borrowers: younger individuals, low-income households, and those with lower credit scores.

• Age: Among borrowers, those aged 18-29 and 30-39 are most affected. In Q4 2023, 11% of borrowers in the 18-29 age group and 9% of those in the 30-39 range were seriously delinquent. In contrast, only 5% of borrowers in their 60s experienced the same.
• Geography: Debt struggles are disproportionately concentrated in poorer regions of the U.S. According to research from the Federal Reserve Bank of St. Louis, the share of people with credit-card debt at least 30 days overdue in the least affluent 10% of neighborhoods rose by nearly seven percentage points, to 18%, from mid-2021 to the end of 2023. By contrast, the share in wealthier neighborhoods increased by less than two percentage points, to 6%. This has led to the widest delinquency gap between affluent and impoverished communities in 25 years.
• Creditworthiness: Delinquency rates are also sharply higher among subprime borrowers. Research by Jordan Pandolfo at the Kansas City Fed found that delinquency rates among "prime" borrowers (those with higher credit scores) have remained stable, even as rates among subprime borrowers have surged.

A “House of Cards”? Not Quite

While rising delinquencies certainly point to financial strain, they don’t necessarily signal an impending recession. In fact, most American households are in relatively good financial shape. Despite the record-high nominal level of credit-card debt at the end of 2023, household debt remains manageable when viewed as a percentage of disposable income. At around 6% of disposable income, credit-card debt is well below the 8% peak reached during the early 2000s borrowing spree.

However, the financial situation is not uniform. America's banking landscape is similarly divided. Small banks report delinquency rates that are more than double those of the nation’s 100 largest institutions. These smaller banks, eager to compete for customers, have been extending credit to riskier borrowers—particularly since the COVID-19 pandemic. As a result, these institutions face higher charge-offs, where unpaid debts are written off as losses. Unlike large banks, small institutions typically lack the resources to effectively monitor and manage high-risk borrowers, exacerbating the delinquency problem.

The Road Ahead

As overdue debt piles up, banks are beginning to tighten their lending standards. A growing proportion of credit cards are being issued to "prime" and "super-prime" borrowers, with fewer being extended to higher-risk individuals. Fitch Ratings expects the delinquency rate to stabilize in 2024, offering some relief to lenders. Still, as long as interest rates remain elevated, the financial pressure on borrowers—particularly those already on the edge—will persist.

Ultimately, while credit-card delinquencies are rising, the situation remains far from a systemic crisis. The rise is primarily concentrated among younger, lower-income, and subprime borrowers, and more affluent households remain relatively unscathed. For now, the financial system appears resilient, but the divide between borrowers and lenders will continue to widen, shaping the economic landscape in unpredictable ways.