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Measuring a level at month-end versus a flow over the past 12 months: Descend with us into delinquency geekdom.
By Wolf Richter for WOLF STREET.
There are different ways to look at the issue of delinquency with the hope of figuring out what’s going on. Let’s use the example of a reservoir. Among the things we can measure are, for example, these two: The amount of water that flowed into the reservoir over the past 12 months, and the level of the water in the reservoir at a point in time.
That important distinction between a “flow” and a “level” is what we now need in order to understand the different measures of credit card delinquencies.
“Delinquency transition rates”: a 12-month flow.
The New York Fed has a unique angle: It tracks the balances that flowed (“transitioned”) into delinquency over the past 12 months. It calls this metric “transition into delinquency” and “delinquency transition rates.”
The New York Fed does not produce “delinquency rates” (the measure of a level) that everyone else produces.
But the Federal Reserve Board of Governors, Equifax, Fitch Ratings, and others produce “delinquency rates” (levels of delinquent balances at month-end).
The New York Fed defines “delinquency transition rate” as the percentage of balances that transitioned into delinquency over the past 12 months. This is a flow into delinquency over a 12-month period, and doesn’t take into account the amounts that flowed out of delinquency (for example, when borrowers caught up with their payments), and it doesn’t measure the level of delinquent amounts at the end of the quarter. But it’s an important indicator that the Fed likes to look at and that Powell has cited during the press conference.
The NY Fed’s Consumer Debt and Credit Report for Q2 said this:
“Over the last year, approximately 9.1% of credit card balances … transitioned into delinquency.”
This line in italics was then widely misreported in the financial media and blogosphere as a delinquency rate of 9.1% (as if it were a level at quarter-end), when it was in fact an annual flow into delinquency.
Meanwhile, the actual “delinquency rate” was 2.81% for bank cards and 4.44% for private-label cards as per Equifax; and 0.99% for prime-rated credit cards as per Fitch. The Fed’s credit card delinquency rate at commercial banks will come in at around 2.96% for Q2.
“Delinquency rates” drop for 4th month in a row.
Equifax, the Federal Reserve Board of Governors, and Fitch Ratings report “delinquency rates” the way we normally understand them as a level at a certain point in time (month end or quarter end).
Delinquency rates on credit card balances (the levels) plunged during the free-money era when people used the cash to catch up with their past-dues and hit a historic low in Q2 2021. Then they began to rise again. They overshot some in 2023 and early Q1 2024, but started dropping again in March, and have declined every month since then. They remain somewhat higher than during the Good Times before the pandemic, but are lower than prior years.
Equifax reported that the 60-day (“severe”) delinquency rates in June declined for the fourth month in a row:
Bank cards: 2.83% (from the high in February of 3.21%).
Private label credit cards: 4.44% (from the high in February of 5.01%).
Federal Reserve Board of Governors hasn’t released its Q2 figure yet. But it reported that credit card delinquency rates at all commercial banks in Q1 (not seasonally adjusted) was roughly unchanged from Q4, at 3.23%.
The Federal Reserve’s quarterly measure tracks the Equifax “bank cards” monthly measure very closely. Given the Equifax reporting of declines in March through June, we can expect the Fed’s Q2 delinquency rate to decline in Q2 as well. We used the Equifax data for April, May, and June to estimate what the Fed’s Q2 data will be. By this estimate, it dipped to 2.96%:
Fitch Ratings reported that its 60-day delinquency rate for prime credit cards (excludes subprime) also declined for the fourth month in a row to 0.99% from the high in February of 1.08%
Credit Card Balances.
Credit card balances are a measure of consumer spending – including for expensive business trips that are reimbursed. They’re not a measure of borrowing because most balances are paid off by due date and never accrue interest, but allow cardholders to get their 1% or 2% cashback, airmiles, and other loyalty benefits. Credit cards are the dominant payment method used by consumers in the US, ahead of debit cards, and far ahead of other payment methods, such as checks or cash.
Credit card statement balances rose by $27 billion, or 2.4%, in Q2 from Q1, to $1.14 trillion, more than making up for the seasonal drop in Q1, according to the New York Fed’s Household Debt and Credit report.
Year-over-year, credit card balances rose by $110 billion, or by 10.8%, in line with healthy growth in consumer spending including on travels and unhealthy growth in prices (red line in the chart below).
“Other” consumer loans, such as personal loans, payday loans, and Buy-Now-Pay-Later (BNPL) loans remained essentially unchanged in Q2 from Q1, at $544 billion, after dropping in the prior quarter. Year-over-year, the rose 3.2% (blue line).
BNPL loans are short-term and interest-free loans that are subsidized by the merchant. They’re a modernized version of installment buying, a concept that has been around forever.
What’s surprising is how little balances have risen in two decades.
“Other” consumer loans are barely up by only 14% from where they had been 20 years ago despite 73% CPI inflation and 16% population growth.
Credit card balances, which reflect spending and not borrowing, are up only 63% from 20 years ago, despite 73% CPI inflation and 16% population growth.
The relative burden of credit card and “other” balances.
As a result, the combined amounts have risen more slowly than household income. Credit card balances and “other” consumer debt combined, at $1.69 trillion, amounted to 8.1% of disposable income in Q2, roughly in the same range as in the past two quarters and in the years before the pandemic.
Disposable income is total income from all sources minus payroll taxes and social insurance payments. It includes wages, interest, dividends, rental income, farm income, small business income, transfer payments, etc., but not capital gains. It’s what households have left over to pay for their monthly expenditures and servicing their debts.
Banks are still eager to open new accounts.
The aggregate credit limit rose by $379 billion year-over-year, to $4.92 trillion, a result of more card accounts (banks are trying as aggressively as ever to get people to set up new accounts) and higher credit limits. Over the same period, credit card statement balances rose by $111 billion, to $1.14 trillion.
So the aggregate available unused credit surged by $235 billion year-over-year, to a record $3.78 trillion.
By contrast, during a credit crunch, aggregate credit limits (blue line) decline – and this economy is far from it:
In case you missed the rest of our consumer credit series over the past two days:
Auto Loans, the Burden of Auto Loans, Subprime Lending, and Delinquencies in Q2
Here Come the HELOCs: Mortgages, the Burden of Mortgage Debt, Delinquencies, and Foreclosures in Q2
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The post Credit Card “Delinquency Rates” Drop for 4th Month despite Confusion over NY Fed’s “Transition into Delinquency Rates” appeared first on Energy News Beat.
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