Pressure Building in Consumer Loans, According to Latest Fed Data

Recent data from the Federal Reserve found heightened pressure in consumer lending, as household debt reached $17 trillion and credit card debt was estimated to surpass the $1 trillion milestone. According to the Fed’s records, cumulative household debt has risen by $2 trillion since before the pandemic.

Banks have noted that those loans have been performing similar to pre-pandemic norms, so delinquency rates and charge-offs were low and are currently on the rise again, but neither are at levels that indicate coming defaults. In August, the Fed reported that savings cushions that were $2 trillion at their peak have fallen to $190 billion, and are likely to be spent down further in the coming months.

At the 100 largest banks, charge-off rates have been increasing, most significantly with credit cards. With charge-offs, the lender has taken the loss and “written off” the loan as uncollectible, and the account cannot accrue more charges. In the future those loans can be sold to a collector,  but the charged-off accounts start showing up on consumers’ credit reports.

At the end of the second quarter, the charge-off rate for all consumer loans was 2 percent, up from 1.1 percent a year earlier. Those rates stayed near 8 percent during the Great Recession. Charge-off rates for credit card debt was 3 percent in the second quarter, up from 1.7 percent a year ago, but the rate stayed near 9 percent during the Great Recession. 

PYMNTS noted that 43 percent of Gen Z consumers are using their cards more often, and 66 percent of this share lives paycheck to paycheck, up from 57 percent in 2022. As student loan repayments start up again, Gen Z could lose up to 4.3 percent of their discretionary spending power, making it more difficult for them to pay down debt.