Credit-Card Delinquency Rates Rise, Particularly Among The Young (#GotBitcoin?)
Interest on credit cards also rising, a New York Fed report adds. Credit-Card Delinquency Rates Rise, Particularly Among The Young (#GotBitcoin?)
Credit-card delinquency rates are rising, particularly among young people who are now more likely to have a credit card than a decade ago, according to a report Tuesday by the Federal Reserve Bank of New York.
About 8.1% of credit-card balances held by people aged 18 to 29 were delinquent by 90 days or more in the first quarter of the year, the highest share since the first quarter of 2011, the bank said. Delinquency rates among older people are slowly rising as well, but remain below the rate for the youngest borrowers.
Those delinquencies risk hurting younger borrowers’ credit scores and could make it more difficult for them to take out mortgages or small-business loans in the future.
Interest rates on those credit cards are also moving up, further squeezing struggling borrowers. Rates on credit-card accounts where interest is charged hit 16.91% in the first quarter of the year, according to Fed data, the highest rate since at least 1994.
A 2009 law made it more difficult for credit-card companies to recruit college students, prompting a decline in the number of young people with cards. That trend has reversed in recent years. Today, roughly 52% of those in their 20s have credit cards, according to the New York Fed report, up from 41% in 2012.
Delinquency rates among young people, which rose to nearly 14% in the third quarter of 2008, fell sharply following passage of the law but started moving up in 2013—roughly when credit standards started loosening, according to the New York Fed.
“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,” said Andrew Haughwout, senior vice president at the New York Fed in a post published by the bank.
On Thursday, Democratic presidential candidate Bernie Sanders and Rep. Alexandria Ocasio-Cortez (D, N.Y.) introduced legislation capping credit-card interest rates at 15%. The bill has little chance of passage in the Republican-held Senate. Another contender for the Democratic nomination, Massachusetts senator Elizabeth Warren, wants to limit credit-card rates to the highest rate allowed under the laws of the state where the borrower lives.
Despite the rising delinquency rate, only 14,000 people aged 18-29 filed for bankruptcy in the first quarter of the year, the smallest number on record going back to 2003.
Overall credit-card balances totaled $850 billion in the first quarter, the New York Fed said, slightly down from the fourth quarter of 2018 as consumers paid off holiday spending. There were roughly 482.7 million open credit card accounts in the first quarter, the most since the third quarter of 2008.
More Troubling Signs..
U.S. Industrial Production Dropped In April
Manufacturing output, the biggest component of industrial production, fell 0.5% in April from a month earlier.
The U.S. manufacturing sector faltered again in April, fresh evidence that a slowing global economy and trade frictions are squeezing part of the U.S. economy.
Manufacturing output, the biggest component of industrial production, fell 0.5% in April from a month earlier, the Federal Reserve said Wednesday. That helped tug down broader output across factories, mines and utilities last month.
So-called industrial production was down 0.5% in April, well below expectations among economists surveyed by The Wall Street Journal for a flat reading.
In April, production of long-lasting goods, such as machinery, electrical appliances and motor vehicles, decreased sharply.
The longer-term trend in manufacturing production shows the sector is pulling back after a strong 2018. In the first three months of 2019, manufacturing output declined by about 0.4% a month, on average. From a year earlier, manufacturing production fell 0.2% in April.
Though manufacturing accounts for a small share of gross domestic product, the sector is highly sensitive to shifts in global demand, making it a bellwether for the broader U.S. economy.
Manufacturing appears to be losing its footing domestically as goods-producing segments overseas flash signs of weakness.
Global manufacturing conditions appeared lackluster in April, according to JPMorgan’s global manufacturing purchasing index, which measures manufacturing conditions based on surveys of companies. The Eurozone PMI contracted for the third consecutive month, pulled down the German manufacturing sector, a persistent source of weakness abroad.
Job growth in the global manufacturing segment was the weakest in about 2.5 years, according to JPMorgan.
“International trade flows remain a significant drag on the manufacturing sector,” said David Hensley, a JPMorgan director.
Wednesday’s report showed manufacturing capacity use, a measure of slack, decreased 0.5 percentage point to 75.7% last month. More broadly, industrial capacity utilization declined to 77.9% in April, which compares with economists’ expectations for capacity use of 78.7% in April.
Output in the volatile mining sector climbed 1.6% in April. Utility output contracted by 3.5% from the prior month.
The “Good Times” For Bank Depositors May Not Last Much Longer
Don’t Get Too Used To Higher Bank Deposit Rates
Some deposit rates have slowed their increases or already declined.
Investors increasingly think the Federal Reserve is on course to cut interest rates at least once this year. That makes it likely banks could start to reverse course on deposit rates, which while still low by historical standards have climbed over the past two years.
Growth in payouts to savers has already begun to stall in some deposit categories. The national average rate for a one-year certificate of deposit, for example, has risen just 0.09 percentage point, to 1.01%, this year through May, according to Bankrate.com. In 2018, that same rate more than doubled.
The average rate on a five-year CD fell by 0.05 percentage point in May from April, the Bankrate.com data showed.
Meanwhile, a recent report from Piper Jaffray, which looked at a range of deposit products from about 120 banks, showed that more products’ deposit rates were falling than rising. Those banks lowered the rates they pay on deposits for 87 different products in the first quarter compared with 18 products for the same quarter a year ago, based on data from DepositAccounts.com. They raised rates on 149 different products in the quarter, compared with 180 a year earlier.
The result: An end could be at hand for the somewhat brief period, starting around two years ago, when depositors finally began earning more than desultory interest on their money. Paltry payouts until then were the result of the Fed’s near-zero interest-rate policies, enacted in the wake of the financial crisis.
While big banks generally have kept payouts low, savers over the past year or so have been able to tap 2%-plus yields for savings accounts at online banks and certificate of deposit rates that in some cases topped 3%, even for shorter maturities. That occurred as the Fed between late 2015 and late 2018 increased short-term rates nine times—bringing the fed-funds rate to a level of between 2.25% and 2.5%—and the yield on the 10-year U.S. Treasury to around 3.25% last fall.
Since then, though, the Fed has put future rate increases on hold and longer-term yields have steadily declined in 2019; the yield on the 10-year Treasury has fallen to around 2.4%.
Adding to the possibility deposit rates will start to decline, especially if the Fed cuts rates: Bank profits are likely to come under pressure from an inversion of the yield curve, or the difference between short- and long-term rates. Banks can offset that pressure by controlling their deposit costs, Piper Jaffray managing director Matthew Breese said.
“If you’re borrowing, you’re excited,” David Turner, Regions Financial Corp. finance chief, said in a recent interview. “If you’re a saver…you’re less excited.”
Banks have said they are already under less pressure to pay up for deposits.
On his bank’s first-quarter earnings call, M&T Bank Corp. finance chief Darren King said the movement of deposit rates slowed in the first quarter given “that there was a little bit less competitive pressure on deposit pricing in any given category.”
Banks also don’t feel under pressure to keep deposits flowing in at a brisk pace because loan growth isn’t particularly strong, Mr. King said in an interview.
Some in the industry also say depositors are conditioned to superlow payouts from postcrisis years when cash earned next to nothing. That makes them less likely to shop around for a better rate if deposit payouts start rising or even fall.
“I think customers are less in tune with the ability to get a return on their deposits,” Kevin Barker, senior research analyst for Piper Jaffray, said.
Ultimately, what banks do with deposit rates will depend in large part on how monetary policy plays out over the remainder of the year. As of May 17, fed-funds futures showed the market pricing in about a 72% chance of at least one interest-rate cut by the end of 2019, according to CME Group .
At the same time, a small but growing number of investors expect the Fed could cut rates more than once in 2019, while the probability of the central bank standing pat on rates has steadily declined this spring.
A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans
As cars become more expensive, buyers are getting hampered by burdensome loans.
John Schricker took out a loan to buy a car in 2017. Then he took out another. And then another.
In two years, the 40-year-old electrician signed up for four auto loans, each time trading in the previous car and rolling the unpaid balance into the next loan. He recently bought a $27,000 Jeep Cherokee with a $45,000 loan from Ally Financial Inc.
Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped.
Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds. Those borrowers owed about $5,000 on average after they traded in their cars, before taking on new loans. Five years ago the average was about $4,000.
Rising car prices have exacerbated an affordability gap that is increasingly getting filled with auto debt. Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer.
Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.
Consumer lawyers say borrowers are typically trading in their vehicles because they have to—often because their needs change, or because the vehicles have problems.
“These aren’t Rolls-Royces,” said David Goldsmith, a lawyer who defends consumers in auto cases. “They’re Ford Escapes.”
Mr. Schricker would like to get a new car because the Jeep Cherokee started having mechanical problems this year. He recently discovered the vehicle was in an accident before he bought it, a fact he said the dealership didn’t disclose. The dealership, Rotolo Motors, didn’t return requests for comment.
Mr. Schricker hired a lawyer, who is trying to resolve the issue with the dealership. He estimates that even if he sold the vehicle, he would still owe Ally up to $18,000. Ally said it couldn’t comment.
Mr. Schricker, who lives in Bethel Park, Pa., said he didn’t intend to cycle through so many vehicles. He replaced one because it had 100,000 miles and another when he went through a divorce, and he changed cars again when his family was expanding.
Borrowers with negative equity at the time of purchase tend to get longer loan terms, higher interest rates and higher monthly payments, according to Edmunds. The higher rates and longer repayment periods mean a smaller share of their monthly payments goes toward paying down principal in the first few years of the loan. The result for some consumers is a cycle in which each new trade-in leaves them deeper underwater.
Underwater car loans are more prevalent among subprime borrowers, according to ratings firms. That is in part because consumers with lower credit scores often don’t have the means to pay off the remaining balance on one car loan before buying their next vehicle.
If borrowers default, lenders generally repossess the cars and try to resell them, then apply that money to the unpaid balance. Often, though, that isn’t enough to cover the borrower’s unpaid balance.
Yolanda Finley of Pomona, Calif., bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. The loan included a nearly $2,200 balance she owed on her Dodge Durango after she traded it in.
The Chevy broke down in 2017 shortly after Ms. Finley took it for an oil change and she couldn’t afford the repairs. She says that Valvoline installed a faulty oil filter and she is suing the company. Valvoline said it was aware of her allegations and had no comment.
Ms. Finley, a 38-year-old legal-support assistant, stopped making payments. Santander repossessed the Chevy in 2017 and resold it for $2,400. The lender soon after informed her that she still owed around $27,000, which she hasn’t paid. Santander said it couldn’t comment on a specific customer’s experience.
Ms. Finley currently drives a GMC Yukon with more than 188,000 miles. She bought it from a family friend for $3,500 out of pocket.
She would like to buy another car, but the only loans she has been offered have high interest rates she can’t afford. Her credit reports state she defaulted on her car loan.
Most auto loans are originated at dealerships, which assign loans to a variety of lenders, including banks, credit unions and the finance arms of car manufacturers.
Lenders are typically willing to make the underwater loans, though they often charge high interest rates. Many of the loans are bundled into bonds and snapped up by Wall Street investors.
The added debt can make it difficult for borrowers to stay current. Some 5.2% of outstanding securitized subprime auto-loan balances were at least 60 days past due on a rolling 12-month average during the period ending in June, up from 4.8% the year before and 4.9% two years before, according to Fitch Ratings.
Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, wanted to trade in the car they shared for something less expensive last year. The friends, who live in Hawaii, ended up splurging on a new vehicle and moving the unpaid loan balance of $12,500 from an older GMC into a new loan for a 2018 GMC Sierra truck.
The rollover debt helped drive up the new loan balance to more than $66,000. The friends now split the payment of more than $900 a month, which they owe to Pearl Hawaii Federal Credit Union for 84 months. Their old loan was about $500 a month.
Pearl Hawaii said in a statement that the dealership and the borrower worked out the sale agreement. The dealer, Cutter Buick GMC, declined to comment.
The friends have had to cut back elsewhere to pay for the truck.
Credit-Card Debt In U.S. Rises To Record $930 Billion
Serious delinquencies increase, particularly among younger borrowers.
Credit-card debt rose to a record in the final quarter of 2019 as Americans spent aggressively amid a strong economy and job market, and the proportion of people seriously behind on their payments increased.
Total credit-card balances increased by $46 billion to $930 billion, well above the previous peak seen before the 2008 financial crisis, according to data released by the Federal Reserve Bank of New York on Tuesday.
Some cardholders, particularly younger ones, are running into trouble.
The proportion of credit-card debt in serious delinquency, meaning payments were late by 90 days or more, rose to 5.32% in the fourth quarter, the highest level in almost eight years, from 5.16% in the third quarter. The serious-delinquency rate for borrowers from 18 to 29 years old rose to 9.36%, the highest level since the fourth quarter of 2010, from 8.91%.
“There are increases in the credit-card-delinquency rate that make you wonder whether some parts of the population are not doing as well, or whether this is just a result of more relaxed lending standards,” Wilbert van der Klaauw, senior vice president at the New York Fed, said in an interview. “It’s something we are looking into.”
The fourth-quarter gain was substantial even accounting for the typical holiday-season increases, Fed economists said. Reclassifying debts on some retail store cards as credit-card debts, rather than non-credit card consumer debt, explains some of the increase, they said.
The rise in card balances is part of the continued expansion of consumer credit seen in recent years, which started with growth in student and auto debt and then shifted to mortgage and credit-card debt. The economy is in its 11th year of expansion, and unemployment is near a 50-year low.
Total household debt increased 1.4% to a record $14.15 trillion in the fourth quarter from the third. That marked the 22nd consecutive quarterly increase as total debt was $1.5 trillion above the previous peak of $12.68 trillion in the third quarter of 2008. The figures aren’t adjusted for inflation.
Mortgage debt rose by $120 billion to $9.56 trillion in the fourth quarter, fueled by a boom in mortgage refinancing as interest rates decline.
Mortgage originations, including refinancing, jumped 42% to $752 billion, the highest level since the fourth quarter of 2005, near the peak of the precrisis housing boom. The median credit score among new borrowers rose five points to 770.
The New York Fed’s report is based on data from a nationally representative sample of individual and household-level records drawn from anonymized Equifax credit data.
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