Home Consumer debt Historical study of the credit card default rate in the United States

Historical study of the credit card default rate in the United States

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Credit card default rates, as measured by the Federal Reserve Bank of New York for accounts overdue 90 days or more in payments, have fluctuated with economic conditions over the decades, but have peaked history during the financial crisis of the fourth quarter. of 2009 when they reached a staggering rate of 11.0%.In the wake of this grim financial chapter, Americans gradually deleveraged (paid off their credit card balances) for several years, from a brief high of just over $ 1 trillion before the start of the crisis in December 2008 to less than 800 billion dollars in the years that followed. .

According to our research, outstanding card balances have remained relatively stable over the intervening years, but have started to steadily rebuild as the economy slowly rebounded from 2014, reaching $ 975 billion in the fourth quarter of 2020.With increasing credit card balances, default rates began to climb in the middle of the decade, although they are well below the alarming levels seen in the previous decade. However, delinquency rates have dropped dramatically over the past year due to the pandemic.

Key points to remember

  • Americans’ credit card debt and defaults increased between the third quarter of 2016 and the first quarter of 2020 after falling sharply in the years immediately following the financial crisis.
  • Delinquency rates peaked in the fourth quarter of 2009 before falling to their lowest point in the second quarter of 2016.
  • Credit card spending declined for most of 2020 due to the pandemic, and defaults declined as a result for most of the year.

Card failures decreased during the pandemic

Contrary to the upward trend in the delinquency rate in recent years, which began to strengthen in mid-2016 after reaching a low of 3.5%, the latest data from the Federal Reserve shows that the delinquency rate Overall delinquency declined from the first quarter of 2020, when it stood at 5.3% and ended the year at 4.1% (probably due to the decrease in spending by card for things such as travel and entertainment during the pandemic).

Older Americans experienced the lowest delinquency rates

The recent trend reversal in the percentage of accounts considered seriously overdue is encouraging news for U.S. consumers, given that credit card defaults can have an extremely damaging effect on personal credit scores as they he payment history accounts for over a third of FICO scores. Based on the age cohort, however, it is evident that different age groups experienced varying rates of delinquency, largely favoring increasingly older Americans depending on the degree of severity. The lowest delinquency rates since 2000 were in the 60-69 age group. Notably, those over 70 had slightly higher delinquency rates than the next cohort of younger baby boomers, possibly due to the inability to pay unforeseen medical bills or the inflexibility of living. with a fixed income in retirement.

Young adults have been disproportionately affected

Not surprisingly, given the lower income rates, the youngest cohort has consistently experienced the highest credit card default rates over time, with their all-time peak occurring several times over. years before the financial crisis, in the fourth quarter of 2002 to 14.5%. While maintaining delinquency rates well above other age groups over the past two decades, 18-29 year olds saw the biggest decline in 2020, encouragingly, from 9.2% to the first quarter to 5.7% in the fourth quarter. Young adults likely have a higher proportion of travel and entertainment spending that has been blunted by COVID-19 restrictions over much of 2020.

Final result

While overall credit card defaults have remained well below levels recorded a decade ago, their percentage increase in total outstanding balances between 2016 and 2019 is a worrying symptom of consumers living above them. of their means, perhaps using credit cards as an extension of their income to make ends meet, or exhausting themselves buying goods and services they cannot afford to pay off immediately. The dramatic drop in severely overdue accounts in 2020, while encouraging, is however likely a temporary result of discretionary spending displaced by the pandemic. Hopefully a reborn economy following large-scale vaccinations will improve the financial situation of consumers and allow for better long-term debt service trends as bad credit card balances likely increase.

Methodology

Historical credit card default rates in the United States were compiled in total and by age cohort by the Center for Microeconomic Data at the Federal Reserve Bank of New York and referred to a statistically significant sample of accounts in past due for 90 days or more, as reported by the credit reporting company Experian.


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