Americans are mostly paying their credit card accounts, auto loans and mortgages on time this year. However, with rising interest rates, increasing inflation, overpriced stocks and a possible overdue recession looming, there are concerns the party could end by 2020.
According to the S&P/Experian July Consumer Credit Default Indices the bank card default rate dropped 15 basis points (bps) to 3.56%; the auto loan default rate increased three bps to 0.96%, and the first mortgage default rate was unchanged at 0.63%.
According to CardData and RAM Research the average early stage delinquency (30+ days) for the second quarter (2Q/18), among the nation’s Top 4 issuers, decreased 17 basis points (bps) sequentially, and declined year-on-year (YOY) by 4 bps.
U.S. consumer revolving credit for June, mostly credit card debt (95%), remained above the $1 trillion level for the fifth consecutive quarter. However, the year-on-year (YOY) change edged downward in June. Consumer revolving credit decreased at an 0.2% annual rate of growth in June, compared to a revised +11.2% annual rate in May and a revised +1.0% annual rate in April.
According to the Federal Reserve, The Financial Obligations Ratio (FOR) and the Debt Service Ratio (DSR) for the first quarter (1Q/18) edged down.
According to the Federal Reserve, on a seasonally adjusted basis, the FOR slightly decreased to 15.75% in 1Q/18, compared to 15.77% in 1Q/17 and 15.52% in 1Q/16. The DSR slipped down to 10.21% in the first quarter of this year, compared to 10.23%% in 1Q/17, and 10.04% in 1Q/16.
The FOR peaked at 18.13% in the fourth quarter of 2007. Since peaking at 13.18% in the fourth quarter of 2007, the beginning of the Great Recession, the DSR has declined steadily since, dipping into single digits for the first time in the fourth quarter of 2012 (9.87%).
Consumers of late have been taking on more debt, but the growth rate is down about one-third of the annual growth rate of the prior year. U.S. revolving consumer credit is now growing at a 4.0% year-on-year (YOY) or annual rate, compared to a 6.1% annual growth rate of the prior year.
Default rates for mortgages and automobile loans have varied very little in the last five years. Defaults on bank cards are more volatile. Despite continued growth of outstanding debt across all three categories which is outpacing wage gain, debt service ratios – the proportion of income needed to cover monthly borrowing costs – are flat to down. One explanation for the stable auto and mortgage default rates is that the share of new loans continues to go to the most credit worthy borrowers since climbing sharply in 2008-2010.