Credit card delinquencies are rising at the fastest pace in more than a decade, which is causing concern among economists, big banks and regulators that this trend could spiral into a major financial headache for households in 2016. Though the job market is still strong and consumer spending hasn’t broken stride, a rising number of Americans are struggling without enough to cover their monthly bills — a red flag that even the nation’s far-roaming economic expansion can leave large swaths of the population behind.
Higher interest rates are peripherally to blame for the surge in delinquencies. Credit card APRs now top new highs‚ including 25–30% on revolving balances. Even for households that are burdened with only moderate levels of debt, the cost of interest has become crippling. A balance that ran up $40 a month in interest may now run up $80 or more — doubling the stress of carrying that debt.
Another explanation is inflation, which keeps pushing up the price of necessities such as rent, food, transportation and health care. While inflation has decelerated from its historic peaks of 2022–23, prices are still more than double the pre-war levels. Once everyday expenses take up a larger portion of income, there’s less leeway for households to keep up with their credit payments.
The third reason is the rise of Buy Now, Pay Later (BNPL). As much as it’s become a convenient replacement to the traditional credit card, BNPL has inadvertently generated hidden debt structures that consumers rarely see coming. Millions of shoppers now have multiple installment plans from different payment services, causing overpayments and skipped installment cycles. And when BNPL balances start to mount in tandem with increased credit card bills, delinquencies rise naturally.
There’s also the income problem. And although wages are up in some industries, they have not kept pace with the cost of living for many families. Retail, hospitality, logistics and education workers have seen pay barely budge after inflation. And there is this wage-pressure gap, which is causing a slow but constant undermining of financial security.
Also worrying is the increase in emergency borrowing. More consumers are using credit cards to help pay for car repairs, medical bills or a temporary lack of income. When the credit is not used as a payment instrument but rather as a parachute in case of insolvency, the risk of delinquency increases largely.
Banks are responding by tightening the standards for lending. Lenders are increasing minimum credit scores, reducing existing limits and introducing tighter scrutiny of new applicants — all signs that financial institutions expect more severe repayment problems soon.
What does this mean for people who buy stuff?
In the near term, rising loan delinquencies could drive higher fees, tighter lending standards or fewer promotional rates. Households that are carrying balances may have increased difficulty refinancing or moving debt to lower-interest options. If delinquencies continue to rise, the effect could eventually follow through to the wider economy by hurting all U.S. consumer spending — a large chunk of U.S. GDP.
Yet, experts say the situation is controllable if inflation stays cooling and wage growth remains steady. But the room for error is closing. For a lot of households, it won’t even require a recession to bear the feeling of one — the mere rise in credit stress could generate its own private financial downturn.
