As credit-card debt tops $1 trillion, smaller banks see a worrisome trend

By Joy Wiltermuth

Credit cards are charging interest rates of 24.37% on average, LendingTree says

Smaller banks have seen credit-card delinquencies hit record levels as the tally of debt tops $1 trillion for the first time in history and as many consumers exhaust their credit, according to the Wells Fargo Investment Institute.

The delinquency rate of credit-card debt at small and medium-size banks hit a record this year, edging close to 8% and eclipsing the previous peak rate (see chart) for all banks, which was reached in the wake of the 2007-2008 global financial crisis.

Delinquencies on credit cards have been climbing at all banks, regardless of size, since the low delinquency rates during the pandemic that followed a deluge of fiscal and monetary support for U.S. households and businesses.

LendingTree (TREE) recently pegged the average U.S. credit-card interest rate at 24.37%.

Car-loan delinquencies have been increasing as well. The New York Federal Reserve's second-quarter household-debt survey indicated that applications for credit cards and car loans have been climbing, but also that more borrowers with lower credit scores have been rejected

That points to a continuing trend of tighter credit after several regional banks failed in spring 2023. Since last year, the Federal Reserve has quickly raised its short-term rate to 5.25%-5.5%, the highest in 22 years, with potential for additional hikes as the central bank looks to wrestle inflation down to its 2% annual target.

Related: Subprime auto defaults on path toward 2008 crisis levels, say portfolio managers

Households and Wall Street will be hoping for more clarity on rates from Fed Chair Jerome Powell on Friday when he speaks at the central bank's annual economic summit in Jackson Hole, Wyo. At last year's event, Powell noted that bringing down inflation would be costly in terms of jobs and economic growth.

See:Jackson Hole meeting: When is Jerome Powell's speech? What investors need to know

Meanwhile, the rising rate of credit-card delinquencies "raises stress on small and medium-sized banks," the Wells Fargo Investment Institute analysts wrote in a Tuesday note to clients.

Following a series of ratings downgrades of reginal banks in August by Moody's Investors Service and S&P Global Ratings, the KBW Regional Banking Index XX:KRX was headed for a seventh straight day of losses on Tuesday and was down 11.1% on the month, according to Dow Jones Market Data.

Stocks were lower Tuesday after a brief bounce on Monday, with the S&P 500 SPX off 0.2%, the Dow Jones Industrial Average DJIA down 0.5% and the Nasdaq Composite Index COMP 1% lower, according to FactSet.

But the Wells Fargo Investment Institute team thinks the economy still has a cushion, even though "many consumers are exhausting their credit, while income growth has slowed sharply."

To that end, the team is forecasting a short, moderate recession and a recovery for most of 2024 and likely into 2025.

-Joy Wiltermuth

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08-22-23 1349ET

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