Moody’s Analytics Report Highlights Alarming Trend
A new report from Moody’s Analytics has revealed that a growing number of Americans are falling behind on their monthly credit card and car loan payments, raising concerns about the state of the economy. The findings published by Moody’s indicate that household debt balances have surged to $17.29 trillion from July to September, representing a 1.3% increase from the previous quarter. This jump in debt balances amounts to an alarming $3.1 trillion increase since the last quarter of 2019, before the COVID-19 pandemic began.
Consumers Face a Dilemma: Spend Less or Plunge Further into Debt
The report highlights a dilemma faced by consumers, stating that they must either curb their spending habits or sink deeper into debt. As a result, the rate of non-residential consumer loan delinquencies is expected to rise. The third quarter of 2021 saw a substantial surge in credit card balances, rising 4.7% from the previous quarter to approximately $1.08 trillion. Auto loan balances also increased, climbing 0.8% to $1.6 trillion.
Uptick in Loan Delinquencies Raises Concerns
In addition to the increase in debt balances, the report suggests that there has been a notable uptick in borrowers struggling with credit card and auto loan payments. Delinquency rates rose for most loan categories during the third quarter and are expected to continue climbing in the coming months due to economic stress, tight lending standards, and possible consumer overreach. This deterioration follows the end of significant government aid and debt forbearance, indicating that some level of consumer financial strain persists despite seemingly healthy household financials.
High Interest Rates Compound the Problem
The dual increase in reliance on debt and delinquency rates is particularly concerning due to the astronomically high interest rates at present. The average credit card annual percentage rate (APR) stands at a record high of 20.72%, according to a Bankrate database dating back to 1985. Similarly, the average new auto loan rate reached 7.4% in November, up from 6.9% at the beginning of the year. The average used auto loan rate is even higher at 11.6%.
This situation poses a significant problem as carrying debt to compensate for rising prices may result in individuals paying more for items in the long run. For example, with the average American owing $5,000, the current APR levels would mean it would take approximately 279 months and $8,124 in interest to pay off the debt by making only minimum payments.
Federal Reserve’s Efforts to Control Inflation Add to the Challenge
The rise in debt balances and delinquencies comes amidst the Federal Reserve’s aggressive interest rate hike campaign aimed at combating stubborn inflation and cooling the economy. However, the combination of high interest rates and increasing debt burdens raises concerns about the economic well-being of American households and hints at potential troubles ahead.