There are “bubbles everywhere” according to Nobel prize winner Robert Shiller, from stocks to bonds to the housing market. But add another one to the list: credit cards.
American credit card debt now stands at $1 trillion – nominally higher than during the 2008 crisis. And delinquencies are rising. At small banks, the delinquency rate is now worse than 2008.
As for interest rates? They’re at all-time highs. This isn’t a crisis yet, but it’s an unsustainable trend. A bubble waiting for a pin.
Household credit card debt recently hit $1 trillion. It’s the fastest-rising household debt, outstripping the pace of auto loans or student loans. By the New York Federal Reserve’s own admission, we’re back at 2008 figures.
“[It] marks the first time credit card balances re-touched the 2008 nominal peak” – New York Federal Reserve.
More than half of users are rolling balances over every month, incurring record levels of interest. And a third are over-extending themselves, claiming they’re worried about maxing out their card when they make a payment.
It’s getting harder and harder to pay back that $1 trillion credit card debt, too. Interest rates hit 17.14% earlier this year – an all-time high, eclipsing 2008 levels.
What’s unnerving is that the Federal Reserve has lowered the federal funds rate three times this year. So your bank is not passing on the lower interest rates to you.
With interest rates at record highs, more and more people are failing to pay back their debt. Delinquency rates are at four-year highs and trending upwards.
The rising rates have been attributed to the increasing number of young people taking on debt.
“The rate at which credit card balances become delinquent has been rising, and that has coincided with an increase in younger borrowers entering the credit card market” – New York Federal Reserve Senior Vice President Andrew Haughwout.
Admittedly, these delinquency rates are still historically low and not even close to 2008 levels. But an unnerving picture emerges when you zoom in to delinquencies at the 5,000+ small banks in America – those outside the top 100.
As you can see in this chart, delinquencies at small banks are at record levels. Way higher than 2008.
The uptick in delinquencies is pushing the major banks to set aside more money to cover the damage. Bloomberg’s Lisa Abramowicz explains:
Banks are boosting the amount of capital they set aside to cover soured consumer loans as serious credit-card & auto loan delinquencies pick up.
JP Morgan set aside $1.3 billion to cover rising delinquencies while American Express boosted the emergency fund by 8%.
This isn’t a crisis yet, but the cracks are appearing. If a recession emerges in the next 18 months, as many have predicted, those delinquencies will soar. Banks will be forced to significantly lower credit interest rates or absorb more losses, potentially triggering a domino effect across the financial industry.
As infamous ‘Big Short’ trader Michael Burry said:
Like most bubbles, the longer it goes on, the worse the crash will be.