by Zain Jaffer
A check of the Federal Reserve Economic Data (FRED) chart on average US credit card delinquencies shows that it more than doubled from a low of 1.54% in Q3’2021 to the latest figure available at 3.16% in Q1’2024.
To some extent, we can say that the low 2021 delinquency was because business activity was slow during the pandemic and immediately afterward, then started to recover.
Another reason for the rise in delinquencies is that average credit card interest rates in Q3-Q4 2021 hovered in the 14.5% range while as of Q1’2024 hovered above 20.5%. That’s easily a six percent rise in rates on average.
For those of us who have credit cards, we often use these for many of our purchases and settle at the end of the month. We purchase our basic necessities like groceries, or even durable goods like appliances on layaway plans. It does make sense because your paycheck arrives at the end of the month, so you just make one payment for convenience.
As long as you do not let interest charges eat you, you should be okay. Generally for most people, it’s the discretionary expenses that are scrapped ahead of basic expenses. Normally we take care of our rent/mortgage payments, food/groceries, electricity/fuel, first before we spend on discretionary items.
Though it is possible someone will not discontinue their iPhone layaway plan and skip meals instead, generally most people do not do that. But it does happen.
The St. Louis Fed which runs the FRED database acknowledges that unemployment (or even underemployment) will likely result in late payments or outright payment defaults. Of course all of these are on average. Each family or individual card holder decides on his/her own whether to try to make the payment, or to delay, or actually stop paying altogether.
America is a nation that runs on credit, and most of us are careful not to do anything that negatively impacts our credit scores. But these higher Fed interest rates have forced the hand of many Americans who are barely making enough.
If the rates had not risen as fast, the delinquencies and defaults would likely be less.
It is no secret that inflation is still running high. Prices of food (even McDonald’s fast food, groceries, fuel, rent, and other basic expenditures are high. So coupled with higher credit card charges, that could mean the difference between the ability to make the payments for both basic and discretionary expenditures, and not being able to.
As an immigrant who was raised with the value of controlling our spending to match what we earn, it pains me to know that many Americans still think that life is just as easy as charging everything and anything to our credit cards, and hoping for the best to make our due payments.
Unfortunately for those of us who have learned the hard way after interest rate charges suddenly rose up, life is not that simple.
Respect that plastic credit card. It is a tool that is there when you need it, but it can bite you back as others will attest, if you do not use it carefully.