Credit card delinquencies: A fair price for growth, or bad sign?
Credit card, auto and mortgage debt led the now habitual rise in household borrowings last quarter, and credit card delinquencies climbed, too, the Federal Reserve Bank of New York said in a report Tuesday.
Credit card debt rose 2.6%, auto loans increased 2% and mortgage debt edged up 0.7%, while student debt remained flat and home equity lines of credit decreased 0.9%, according to the New York Fed’s Quarterly Report on Household Debt and Credit.
The components were all part of the 12th consecutive quarterly increase in total household debt, which reached $12.84 trillion in the second quarter and surpassed its previous peak in 2008, the report said.
Total credit card debt in America now stands at $784 billion, and credit card delinquencies continued to climb from the year-earlier period, according to the agency’s data. Yet experts with the New York Fed struck a cautious tone.
“While relatively low, credit card delinquency flows climbed notably over the past year,” Andrew Haughwout, senior vice president at the New York Fed, said in a press release. “This is occurring within the context of loosening lending standards, as borrowers with lower credit scores recover their ability to access credit cards. The current state of credit card delinquency flows can be an early indicator of future trends, and we will closely monitor the degree to which this uptick is predictive of further consumer distress.”
Credit card delinquencies of 90 days or were 7.38% of total balances in the second quarter, up from 7.17% in the year-earlier quarter. However, the latest figure was lower than the first quarter’s delinquency rate of 7.45%.
On an annualized basis, 6.19% of all credit card balances became newly delinquent by 30 days or more and 4.42% became newly delinquent by 90 days or more.
In a blog post for the agency, New York Fed economists added some nuance to the data. For starters, they said, credit card lending has continued to rebound from a sharp decline from 2009 to 2013, the result of consumer deleveraging and restrictions on lending to younger borrowers.
Net new credit card accounts and credit limits continued to rise in the second quarter, but while more new cards were issued to borrowers with lower credit scores, borrowers with higher credit scores were given higher credit limits. For instance, nearly half of subprime borrowers had credit limits of $2,000 or less, while 84% of borrowers with a score of 780 or higher had credit limits greater than $10,000.
Marla Blow, CEO of the startup lender FS Card, offered a similar assessment. Several years ago there was a dramatic reduction in the availability of credit to subprime borrowers, said Blow, formerly the assistant director of card and payment markets with the Consumer Financial Protection Bureau. Now those borrowers can access credit a little bit more easily than in years past, and it is showing up in the data. Blow also sees some of it as a return to normalization, particularly given other economic indicators.
“It’s definitely a thing to keep an eye on and certainly not something I want to be blasé about, but I think there is some normalization in the credit risk picture that we ought to expect,” she said.
And as a share of total household debt, credit card debt was 6.1% in the second quarter, compared with 6.7% in the same period in 2008.
Mortgage debt ($8.69 trillion) still made up the largest share of total household debt, but it has fallen over recent years as a percentage of total household debt. In the second quarter, mortgage debt stood at 67.7% of total debt, compared with 73.6% in the second quarter of 2008. Meanwhile, student debt, which totaled $1.34 trillion in the second quarter, has risen to 10.4% of total household debt from 4.6% at that time.