Maxed-Out Borrowers Face Rising Delinquency Rates Amid High Interest Rates, New York Fed Reports

The New York Fed‘s latest findings depict a troubling scenario of American household debt, with total balances reaching $17.69 trillion, and mortgage balances rising to $12.44 trillion. The report found that while some households remain financially stable, others are increasingly maxing out their credit cards and struggling to keep up with payments.

Younger borrowers and those from low-income neighborhoods are particularly vulnerable, with nearly one in five cardholders using at least 90% of their credit limit. Those maxed-out borrowers have a median total credit limit of $5,000 which is lower than borrowers with lower utilization rates, according to the report.

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As the cost of living continues to rise and borrowing remains expensive, the risk of delinquencies is expected to grow, posing challenges for consumers and the broader economy.

Trapped In A Debt Cycle

Credit card balances rose 13.1% to $1.115 trillion in the first quarter, which is $129 billion more than last year. For those who can pay their balances in full each month, this isn’t an issue. However, nearly 44% of borrowers carry credit card debt from month to month, according to Bankrate.

The COVID-19 pandemic initially saw many people paying down their debts, aided by relief payments and a low interest-rate environment. However, the trend has since reversed, with credit card delinquencies returning to pre-pandemic levels despite rising wages and low unemployment rates.

The New York Fed’s report indicates that the increase in delinquency rates is most notable among those who have maxed out their credit cards. The group is experiencing higher delinquency transition rates than before the pandemic, suggesting financial distress is growing among some households.

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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. The nationwide aggregate credit card utilization rate was about 23% last quarter, but the utilization rates of individuals differ widely.

The report also found that 3.2% of outstanding debt was delinquent as of March 2024. Delinquency transition rates rose across all borrowing types, with 8.9% of credit card accounts and 7.9% of auto loan accounts moving into troubled status.

Borrowers using more than 60% of their credit are falling into delinquency at a faster pace than before the pandemic, the New York Fed said, making up most of the increase in credit card delinquency rates. About a third of balances associated with borrowers using more than 90% of their credit became delinquent in the past year, compared to about 25% before the pandemic.

The report also noted that auto loan delinquencies have increased alongside rising monthly car payments, with nearly 2.8% of auto loans now 90 or more days delinquent, affecting over three million vehicles.

Although American consumers generally have strong balance sheets, according to the Fed's data, rising financial stress among certain groups is evident.

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