With the free money gone, the hangover is getting worked off.

By Wolf Richter for WOLF STREET.

The 30-day-plus delinquency rate on credit cards issued by all commercial banks declined to 3.05% in Q1 seasonally adjusted, the third consecutive quarter of declines, and was below the delinquency rate in Q1 last year (3.17%), according to data from the Federal Reserve today.

The plunge in delinquencies during the pandemic was a result of Free Money flooding households, which some folks used to get caught up; and it was also driven in part by limited options of spending, with restaurants, flights, cruises, entertainment venues, etc. being largely shut down, which caused credit card balances to plunge (see further below).

When the Free Money was gone, the delinquency rate overshot, crested in Q2 2024, and then declined as the hangover has been getting worked off. Our Drunken Sailors, as we lovingly and facetiously have come to call them here, are a hardy bunch!

For prime-rated cardholders, serious delinquencies of 60-plus days remained unchanged in March at a pristine 1.07%, not seasonally adjusted, according to data from Fitch Ratings, which tracks the performance of Asset Backed Securities (ABS) backed by prime credit card balances.

This delinquency rate has hovered since December 2023 in the Good Times normal range that prevailed in the five years before the pandemic of just above 1%.

Note the “frying pan” pattern, as we infamously have come to call it here, because we have seen it in so many other credit measures since the pandemic, during which the episode of Free Money altered everything, and when the Free Money was over, the metrics re-normalized.

Credit card balances: a measure of spending.

Credit card balances (red line in the chart below) fell by $29 billion in Q1 from Q4, to $1.18 trillion, according to the New York Fed’s Household Debt and Credit report. The decline was largely seasonal as credit card balances typically decline in Q1 from Q4.

Credit card balances are statement balances before payments are made.

Year-over-year, credit card balances rose by 6.7% on consumer spending growth and price increases.

Credit cards are a measure of spending, not a measure of borrowing; they’re the dominant consumer payments method in the US and largely replaced checks and cash. They’re used to pay for anything, from parking meters to business trips that get reimbursed. Credit cards were used for nearly $6 trillion in transactions in 2022 (Nilsen).

“Other” consumer loans (blue line), such as personal loans, payday loans, and Buy-Now-Pay-Later (BNPL) loans, dipped by $1 billion in Q1 from Q4 to $540 billion, and were roughly unchanged from a year ago. Balances have barely risen over the past 22 years, despite the growth of the population, income, and spending over the period.

The burden of credit-card balances: debt-to-income ratio. 

Credit card balances (red above) and “other” consumer debt (blue above) combined declined by $41 billion, or by 2.3%, in Q1 to $1.74 trillion. Year-over-year, they rose by $66 billion, or by 4.0%.

To track the burden of these balances on consumers overall, we look at their relationship to disposable income. Debt-to-income ratios are classic measures of borrowers’ ability to deal with the burden of their debt.

Disposable income is household income from all sources except capital gains, minus payroll taxes: So income from after-tax wages, plus income from interest, dividends, rentals, farm income, small business income, transfer payments from the government, etc. It represents the cash households have available, after payroll taxes, to spend on housing, debt payments, food, fuel, and other expenses.

• QoQ: disposable income +1.6%, credit card & other balances: -2.3%.
• YoY: disposable income +4.0%, credit card & other balances: +4.0%.

Combined balances declined to 7.8% of disposable income in Q1 from Q4, same as the ratio in  Q1 2024.

The ratio has now come back up from those free-money record lows when a lot of travel and entertainment spending was cut, and is back at the low end of the range of the Good Times before the pandemic, and far lower than any time before in the data going back to 2003, when the ratio was 14%.

Credit Limits & Available Credit expand to new high.

Banks are trying as aggressively as ever to get people to set up new credit card accounts, and they have raised the credit limits of existing accounts, and the aggregate credit limit has surged from record to record and in Q1 hit $5.16 trillion (blue in the chart below).

So the total available unused credit – aggregate credit limit (blue) minus credit card balances (red) – surged to a record $4.0 trillion. During and after the Great Recession, banks cut credit limits, closed accounts, and licked their wounds, which caused aggregate credit limits to plunge by 28% through 2010.  But there has not been any sign of this happening now; on the contrary:

And if you missed it:

Auto-Loan Balances, Debt-to-Income Ratio, Serious Delinquencies for Subprime & Prime in Q1 2025: Our Drunken Sailors and their Auto Loans

Here Come the HELOCs: Mortgages, Housing-Debt-to-Income-Ratio, Serious Delinquencies, and Foreclosures in Q1 2025

Household Debts, Debt-to-Income Ratio, Serious Delinquencies, Collections, Foreclosures, Bankruptcies: Our Drunken Sailors’ Debts in Q1 2025

 

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