Fewer cardholders are becoming late on their payments: New York Fed

Fewer credit card borrowers went tardy on their payments in the third quarter, the Federal Reserve Bank of New York said Wednesday, providing some evidence that household financial stresses are stabilizing.

Some 8.8% of credit card balances fell into delinquent status during the quarter, down slightly from 9.1% in the second quarter, according to the regional Fed bank's quarterly look at household debt trends.

Late payments on credit cards remain higher than they were before the COVID-19 pandemic, and slightly more auto loan borrowers became late on their payments versus the second quarter, the report found.

But the researchers who compiled the data pointed to the improved credit card figure as one sign that worsening consumer credit quality may be moderating.

"We have to be careful about a single quarter's worth of data," one of the New York Fed researchers told reporters. "But we're definitely glad to see that there's some, if only small evidence, of a moderation here."

The finding lines up with recent commentary from bankers, who have flagged improvements in consumer health after Americans faced stresses from high inflation and rising interest rates.

Bank of America is seeing "healthy behaviors" from its consumer clients, Holly O'Neill, the company's president of retail banking, said last week at a BancAnalysts Association of Boston conference. While cardholders have experienced tougher times over the last year, the bank has seen "some stabilization" in those metrics, she added.

The Charlotte, North Carolina-based bank charged off some 3.7% of its credit card loans in the third quarter, up from 2.7% a year earlier, but slightly better than its 3.9% charge-off rate in the second quarter of 2024.

Wells Fargo has also reported some improvements this year, with its credit card delinquency rate dipping slightly in the third quarter to 2.87%, down from 2.92% at the start of the year.

"Most consumers are doing well," Wells Fargo Chief Financial Officer Michael Santomassimo said at last week's conference, even as he flagged more pronounced stresses among lower-income households.

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Consumers appear to be headed "toward a financial equilibrium," thanks to lower inflation and continued wage gains, Paul Siegfried, senior vice president at the credit reporting firm TransUnion, said in a recent report that identified stabilization in credit metrics. Credit card companies' tighter lending standards may also be playing a role, as higher delinquencies prompted lenders to take a more cautious approach, he added.

The New York Fed report did find that late payments on auto loans ticked up, with the share of loans in delinquency rising to 8.12% in the quarter from 7.95% in the second quarter. But so-called seriously delinquent auto loans, where borrowers are 90 or more days late, stayed flat.

Ally Financial, a major auto lender, has suffered from a falling stock price this year while reporting increases in problem loans. Its chief financial officer pointed last month to "encouraging signs," suggesting that the worsening has stabilized, but has avoided giving overly specific guidance on the issue.

During the third quarter, overall household debt rose by 0.8% to $17.94 trillion, the New York Fed said. Balances on consumer credit cards, auto loans, student loans and home equity lines of credit all rose, and new mortgage debt also ticked up from a year earlier.

A blog post tied to the New York Fed's report examined whether households' growing debt levels are sustainable, and it flagged one encouraging data point in that regard: Americans' incomes have risen faster than debts.

While more detailed analyses could examine disparities across income, race and age groups, the overall ratio of households' debt to their income was at 82% in the third quarter. That figure was lower than the 86% recorded in 2019 and far below the 120% rate in 2008, when the housing market crashed and sparked a financial crisis. 

"The recent downward movement in the ratio of debt to income has been followed by an apparent moderating of delinquency rates for auto loans and credit cards during the third quarter, and if that trend continues, it would suggest that rising debt burdens remain manageable," the New York Fed researchers wrote in their blog post.