US Banks Tighten Lending as Consumer Delinquencies Hit Pre-Pandemic Highs
Rising defaults on credit cards and auto loans signal growing stress on household finances, posing a headwind for US economic growth.
A steady rise in consumer loan defaults is pushing banks to tighten their lending standards, a trend that threatens to slow the US economy by crimping the borrowing that fuels household spending.
Data from across the financial industry paints a picture of growing strain on American consumers. Early-stage delinquencies, representing borrowers 30 to 59 days past due, have now returned to levels not seen since before the pandemic. A recent report from credit scoring firm VantageScore noted that delinquencies rose across auto loans, credit cards, mortgages, and personal loans, prompting a more cautious approach from lenders.
This pullback is a direct response to deteriorating credit quality. The Federal Reserve Bank of New York’s latest quarterly report on household debt showed that 4.4% of all outstanding debt was in some stage of delinquency by the end of the second quarter. While overall debt continued to climb, reaching $18.39 trillion, the increase in late payments suggests that higher interest rates and persistent inflation are beginning to take a significant toll on household budgets.
Credit cards and auto loans have emerged as particular areas of concern. According to the Federal Reserve's G.19 consumer credit report, revolving credit, primarily from credit cards, has expanded significantly over the past year. At the same time, delinquency rates on those balances have been steadily climbing. The situation is even more acute in the subprime auto market, where default rates are approaching levels last seen during the 2008 financial crisis.
The trend is forcing a strategic retreat among financial institutions. The Federal Reserve's most recent Senior Loan Officer Opinion Survey revealed that a significant net percentage of banks reported tightening standards for credit card and other consumer loans. Lenders also reported weaker demand for most loan categories, a sign that both banks and consumers are growing more risk-averse.
“We’re seeing a clear shift from the post-pandemic credit boom to a period of normalization and risk management,” said one analyst at a major ratings agency. “The erosion of excess savings, coupled with higher costs for essentials and debt service, means more households are falling behind.”
These developments have significant implications for the broader economy. Consumer spending accounts for roughly two-thirds of US gross domestic product, and much of that spending is financed by credit. As banks reduce credit availability and consumers pull back on borrowing, it creates a direct headwind for economic growth, particularly impacting the consumer discretionary and financial sectors.
For the Federal Reserve, the data presents a complex challenge. Rising delinquencies indicate its aggressive rate-hiking cycle is successfully cooling the economy, but they also elevate the risk of a hard landing. All eyes are now on the New York Fed’s upcoming third-quarter household debt report, which will provide a more current snapshot of whether these pressures on the US consumer are intensifying.