US Credit Cards: Highest Default Rates Since 2008 Financial Crisis

The defaults on US credit card loans have reached their highest level since the 2008 financial crisis. This suggests that the financial health of low-income consumers has been impaired after years of high inflation. Credit card issuers wrote off $46 billion in loans in the first nine months of 2024, a 50 percent increase compared to the previous year and the highest level in 14 years, according to data from BankRegData. Charged-off loans, which are written off as unlikely to be repaid, are an important indicator of significant credit distress. Moody’s Analytics Chief Economist Mark Zandi states, "High-income households are stable, but the lower third of US consumers have depleted their savings." The rapid rise in defaults highlights the increasing strain on consumers' personal finances after years of high inflation, coupled with the Federal Reserve's raised interest rates. Although banks' fourth-quarter figures are still pending, there are early signs that more and more consumers are significantly behind on their payments. Capital One, the third-largest credit card issuer in the US after JPMorgan Chase and Citigroup, recently reported that its annual charge-off rate rose to 6.1 percent in November, compared to 5.2 percent in the previous year. Rising credit card balances are particularly burdensome for low-income consumers who are struggling to pay off their credit card debts. The hope that the Federal Reserve will significantly lower interest rates in 2025 received a setback recently when only a 0.5 percentage point reduction was forecasted for the coming year. Despite charge-offs amounting to nearly $60 billion last year, consumers still have credit card debts of $37 billion that are already one month overdue. Delinquency rates, which are considered precursors to charge-offs, peaked in July and have since only slightly decreased. The outlook is concerning, as Donald Trump’s threat of extensive tariffs, which could increase inflation and interest rates, may pose additional challenges for consumers in 2025.