Credit Card Defaults Soar Amid Rising Inflation and Interest Rates

Credit card defaults are rising at the fastest pace since the Great Recession, as borrowers struggle to keep up with rising inflation and interest rates. According to Goldman Sachs, credit card losses currently stand at 3.63%, up 1.5 percentage points from a low reached in September 2021. The firm predicts that losses will continue to climb through the end of 2024 or early 2025.

The acceleration in credit card losses is notable as it is not typically seen outside of an economic downturn. Three of the past five credit card loss cycles were during recessions, including the early 1990s, the early 2000s, and the 2008 Great Recession. The other two were in the mid-90s and 2015 to 2019.

Credit Card Defaults Soar Amid Rising Inflation and Interest Rates

There are a number of factors contributing to the rise in credit card losses. One is the high rate of inflation, which has eroded consumers' purchasing power and made it more difficult for them to make ends meet. Another factor is the Federal Reserve's aggressive interest rate hikes, which are making it more expensive for borrowers to carry debt.

In addition, consumers are taking on more credit card debt. The average credit card balance in the United States is now over $6,500, the highest level on record. This is making borrowers more vulnerable to defaults if their financial situation worsens.

The rise in credit card losses is a concern for both borrowers and lenders. For borrowers, it means that they are more likely to have their credit cards charged off or to be sued by creditors. For lenders, it means that they are losing more money on bad loans.

What can borrowers do to avoid credit card defaults?

If you are struggling to keep up with your credit card payments, there are a number of things you can do to avoid default:

• Make a budget and track your spending. This will help you to identify where your money is going and to make sure that you are spending less than you earn.

• Prioritize your debt payments. Make sure to make at least the minimum payment on all of your credit cards each month. If you can, try to pay more than the minimum on your highest-interest credit cards.

• Consider a debt consolidation loan. If you have multiple credit cards with high interest rates, you may be able to save money by consolidating your debt into a single loan with a lower interest rate.

• Talk to your creditors. If you are struggling to make your payments, contact your creditors to see if they are willing to work with you. They may be willing to lower your interest rate or to create a payment plan that works for your budget.

What are lenders doing to address the rise in credit card losses?

Lenders are taking a number of steps to address the rise in credit card losses. One is that they are becoming more selective in who they issue credit cards to. They are also tightening their underwriting standards and requiring higher credit scores for new borrowers.

In addition, lenders are offering more credit card assistance programs to borrowers who are struggling to make their payments. These programs may include lowering interest rates, creating payment plans, and waiving late fees.

Conclusion

The rise in credit card losses is a concern for both borrowers and lenders. Borrowers should take steps to avoid default, such as making a budget, prioritizing their debt payments, and talking to their creditors if they are struggling to make their payments. Lenders are also taking steps to address the rise in losses, such as becoming more selective in who they issue credit cards to and offering more assistance programs to borrowers who are struggling to make their payments.