Only 18% of credit-card holders maxed out their cards, less than before the pandemic, but fell behind at a higher rate.
By Wolf Richter for WOLF STREET.
Who are the cardholders that became newly delinquent in Q1? They’re cardholders who’d maxed out their credit cards in the prior quarter, having used up 90% to 100% of their available credit, with all their credit cards at or near the credit limit, according to an analysis by the New York Fed of Equifax data.
But only 18% of credit cardholders are “maxed out.” Not 18% of consumers, but 18% of credit-card users – big difference because many consumers don’t have credit cards at all, but use debit cards.
Credit card utilization is a function of both the amount charged to the card and the card’s credit limit. So people with lower limits generally have higher utilization rates.
Cardholders can also be maxed-out because the lender lowered the credit limit to prevent further spending.
Credit-card utilization rates in Q1:
52% of cardholders used less than 20% of their available credit
19% of cardholders used between 20% and 60% of their available credit
11% of cardholders used between 60% and 90% of their available credit
18% of cardholders used 90% or more of their available credit; they’re “maxed-out”
The share of maxed-out borrowers has been increasing from pandemic lows but it still below pre-pandemic levels, according to the New York Fed’s study. In Q1, the share of those maxed borrowers was 18%, and this includes borrowers who were delinquent and those who were not delinquent.
The share of not delinquent maxed-out borrowers hovered around 10% before the pandemic. It plunged during the pandemic as people used stimulus money to pay down their credit-card balances. And it started rising as spending took off again. But the share remains below prepandemic times.
As is typical for Q1, some borrowers paid down their cards from the holiday spending binge and then were no longer maxed out, and the share dipped:
Transitioning into delinquency v. available credit.
Of the 52% of cardholders who used less than 20% of their available credit, only a small portion missed a payment in Q1 to transition into delinquency. Those rates haven’t changed much and are roughly the same as before the pandemic (lowest blue line in the chart below).
People miss payments for all kinds of reasons, in addition to being short on cash, such as forgetting to make a payment, or an automatic payment not happening. So there are always some missed payments that get fixed quickly, and these people then transition back out of delinquency.
The 19% of cardholders who used 20% to 60% of their available credit had experienced a dip in the rate at which they transitioned into delinquency during the pandemic, and the rate then rose back to pre-pandemic levels and remains low (red, second lowest line in the chart below).
The 11% of cardholders who used 60% to 90% of their available credit have transitioned into delinquency at a higher rate than before the pandemic (brown line, third lowest line).
The 18% of cardholders who are maxed out transitioned into delinquency at a much higher rate than before the pandemic (chart by the New York Fed, we added the labels).
Overall credit availability rose.
Banks are still trying to get people to open new card accounts, and they have raised credit limits for many card holders, and so the total credit limit surged 9% year-over-year in Q1 to $4.85 trillion (blue line in the chart below).
Credit card balances ticked down to $1.11 trillion (red line). So total available unused credit rose to a record $3.74 trillion:
This sheds some light on the overall delinquency rate.
Earlier this week, we discussed overall consumer debt, delinquencies, third-party collections, and bankruptcies, which remained low; and housing-related debts, delinquency rates, and foreclosures, which remained very low. So here is the part that’s not so low anymore.
Cardholders who’ve maxed out their credit cards in the prior quarter are much more likely to become delinquent in the current quarter than the rest of the bunch.
Only about 18% of credit cardholders are maxed out, so this is a relatively small portion of consumers – given that many consumers don’t even have credit cards, but use debit cards – but they’re falling behind at a higher rate than before the pandemic, and they leave their imprint on the overall delinquency rate.
Credit card balances that were 30 days or more past due rose to 8.9% in Q1. In 2019, the rate was about 7.0%. Before the Great Recession, it was between 8.5% and 12% (red line).
“Other” consumer credit balances – personal loans, payday loans, and Buy-Now-Pay-Later (BNPL) loans, etc. – that were 30 days or more past due inched up to 7.6%, a tad above where it was in 2018 and 2019 (blue).
Credit card balances dipped in Q1.
Credit cards are the dominant payments method for consumers, having largely replaced checks and cash. They’re used to pay for anything, from bar tabs to expensive business trips that get reimbursed. Many small business owners use credit cards as payment method for business purchases. Credit cards were used for over $6 trillion in transactions in 2023. And very little of it got stuck as interest-bearing debt; most of it was paid off by due date with no interest due. They are primarily a measure of purchases, not of interest-bearing debt.
Consumers are incentivized to pay with their credit cards through loyalty programs, such as 1.5% cash back or frequent flyer miles, and they do that and pay off their statement balances every month, and relish with the freebees. Banks can offer those rewards and still make money because they collect a fee, such as 3% of the purchase amount, each time a cardholder uses the credit card. Merchants pay for it all.
So credit card balances – monthly statement balances before payments are made – dipped by $14 billion, or by 1.2%, in Q1 from Q4, to $1.11 trillion, according to the New York Fed’s Household Debt and Credit report. A dip is normal in Q1 after the holiday spending and travel boom.
Year-over-year, credit card balances rose 13.1%, as prices rose, and more accounts were opened as more people had jobs, and as consumers spent more (red line in the chart below).
“Other” consumer loans (blue line), such as personal loans, payday loans, and BNPL loans, fell by $11 billion, or by 2.0%, in Q1 from Q4, to $543 billion. Year-over-year, “other” loans rose by 6.1%.
Everything has grown — faster than credit-card balances.
Credit card balances need to be seen in light of the US population that has surged over the years, and of incomes that have surged, and of the number of workers that has surged.
One of the ways to track the burden of these balances is to compare them to disposable income, which is income of the total population from wages, interest, dividends, rentals, farm income, small business income, transfer payments from the government, etc., minus taxes and social insurance payments; but it does not include capital gains.
Disposable income has surged with the growth in wages, employment, rental income, interest and dividend income, etc. (data from the Bureau of Economic Analysis):
Quarter over quarter: +1.1%
Year-over-year: +4.3%
Since 2019: +26.7%.
The burden of the balances of credit cards and “other” consumer debt combined ($1.66 trillion) dipped to 8.0% of disposable income. Two decades ago, that ratio was 14%:
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The post Who Fell Behind on their Credit Cards: Delinquencies, Balances, Burden, Available Credit, and the “Maxed Out” appeared first on Energy News Beat.
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