Americans are struggling to pay their debts as economy tightens

Americans are having a harder time making interest payments as savings are shrinking and a barrage of interest rate hikes by the Federal Reserve have jacked up the cost of financing.

Delinquency rates on credit cards, mortgages and auto payments have all been ticking up as the level of household savings, which swelled under stimulus payments handed out during the pandemic, have been declining.

Sixty-day car payment delinquencies for people with bad credit hit an all-time record of 6.1 percent in September, up from 5.8 percent in August, according to data from Fitch Ratings. That’s the highest level of lateness since the company first started tallying rates in 1994.

Ninety-day delinquency on credit cards has increased to 5.1 percent, up from 3.4 percent in the second quarter of last year, Federal Reserve data shows.

“The steady increase in delinquencies for three consecutive quarters signals stress on consumer ability to repay balances on general-purpose credit cards,” Herman Poon, a senior director at Fitch, wrote in a July analysis of consumer behavior.

“Despite the rise, [second quarter] delinquencies continued to remain below the observed 2017 – 2019 pre-pandemic levels, which hovered above 1 percent,” he and his co-authors noted.

Credit card debt is ballooning

U.S. credit card debt and other types of revolving loans surpassed $1 trillion in August, with outstanding balances on bank cards climbing 18.1 percent above where they were last year to reach $851.4 billion, according to financial data company Equifax.

Sixty-day payment lateness increased to 1.8 percent from 1.32 percent in 2022, with the delinquency rate rising steadily over the course of last year.

Credit card use and loan balances fell off a cliff during the pandemic as government checks were helicoptered onto households by both the Trump and Biden administrations.

“After the Covid 19 national disaster declaration in April 2020, overall card utilization declined to historically low levels with slight seasonal fluctuations,” Equifax analysts said in their October report on national consumer credit trends.

The uptick in delinquencies is likely a sign of the economy re-normalizing after the pandemic rather than a harbinger of an impending downturn, economists say.

“It is unfortunate, but it is not a big warning sign for the economy,” economist Dean Baker with the Center for Economic Policy and Research told The Hill.

“The rising rates of delinquencies are just bringing them back to where they were before the pandemic, when the economy was very strong by most measures. They were very low during the pandemic because people were getting the pandemic checks, which gave them an unusual cushion. They have now spent through this cushion in most cases, so many people are back to where they were pre-pandemic,” he said.

Mortgage debt that’s flowed into 90-day delinquency was 0.63 percent in the second quarter, up from 0.44 percent in the second quarter of last year, according to Federal Reserve data.

Across all types of debt — encompassing auto loans, student loans, mortgages, home equity credit lines and credit cards — 1.16 percent was more than 90 days late in the second quarter, up from 0.84 percent in the second quarter of 2022.

“Credit cards balances saw the most pronounced worsening in performance in [the second quarter] after a period of extraordinarily low delinquency rates during the pandemic,” Fed economists noted.

More common 30-day delinquencies are trending up in mortgages, credit cards and auto loans, while lateness on student loan payments, which resumed in October following a loan forgiveness contest between the Biden administration and the Supreme Court, has yet to trend up.

Savings are being depleted as consumers struggle

Research by the Federal Reserve Bank of San Francisco suggests that the savings accumulated by American households during the pandemic likely ran out over the summer.

Researchers put the pandemic savings at $2.1 trillion, offset by $1.9 trillion in drawdowns as of June. Since then, the personal saving rate has fallen further below its pre-pandemic trend, coinciding with the rise in the use of credit and in the rate of delinquencies.

“Our estimates suggest that a relatively small amount – around $190 billion – remains in the overall economy, and we expect the aggregate stock of excess savings will likely be depleted during the third quarter of 2023,” San Francisco Fed researchers wrote in August.

Fed bankers are hearing that the depletion of savings is worrying some business owners.

“A St. Louis auto dealer reported that despite pent-up demand from lack of inventory, business activity is being affected by decreased savings and high credit card debt,” the Fed’s October beige book, a periodic anecdotal survey of the U.S. economy, reported.

A survey by Lending Tree earlier this year found that 64 percent of Americans consider themselves as living “paycheck to paycheck.”

Census Bureau data shows that of the 124 million households in the U.S., only about a fifth receive income from stock market dividends, interest payments or rental properties.

Twenty-five million households make money this way, while almost 100 million do not.

Biden takes fire for economic troubles

The divide between the rich and everybody else in America may be one of the reasons that the Biden administration’s handling of the economy, which has been marked by unexpectedly positive metrics, has gotten poor marks in public opinion polls.

Polling by The Associated Press in August revealed that only 36 percent of U.S. adults approved of his stewardship of the economy, while 42 percent approved of the job he’s doing as president.

That’s despite a big drop in inflation over the past year, which has fallen from a 9 percent annual increase last June to 3.7 percent in September.

In the face of weak approval ratings, the administration has nonetheless been giving its economic policies the hard sell to Americans, touting the mix of public and private investment as a key feature of “Bidenomics.”

On Wednesday, Vice President Harris announced an expanded initiative to help money lending institutions geared toward minority-owned businesses and economically disadvantaged communities.

“The U.S. Department of Treasury estimates that these investments in community lenders will result in a $50 billion increase in lending to Latino communities and a nearly $80 billion increase in lending to Black communities over the next decade,” the White House said in a statement Wednesday.

Democrats hope such initiatives will spark enthusiasm about the economy ahead of the 2024 election, but they have yet to translate to more positive polling.