Does your business depend on recurring revenue? Rely on predictable CAC? Is it vulnerable to churn and failed payments? What we uncovered from a Federal Reserve study could change how you look at the future.
There’s some incredible new data around credit card delinquencies and consumer debt from the New York Fed. It’s a relatively obscure report—published every quarter by the Center for Microeconomic Data—and the data we’ve extracted from all 43 pages will help prepare you for Q4 and beyond.
Why you should care
Credit card delinquencies, debt levels, and consumers’ ability to pay are all factors that affect your cancellations, failed payment volume, and CAC. So if you can peek around the corner and see what’s coming, why wouldn’t you?
Here’s what we learned from the “Quarterly Report on Household Debt and Credit."
Credit card balances, delinquencies are still rising
Credit card balances grew by $48 billion in Q3 2023, making it the eighth quarter of consecutive YOY increases. On top of that, credit card delinquencies are up by nearly 18% since Q2 2023, with delinquencies rising to 2% in Q3 2023 from 1.7% in Q2. In Q3, 9.4% of credit card debt was over 90 days delinquent, which is a large jump up from the 8% in Q2.
Who’s driving delinquencies
Rising delinquencies are happening broadly across income groups and regions. But it’s disproportionately driven by Millennials and, in a smaller capacity, Gen Z. Delinquencies are also happening more often among households with auto or student loans, and those with higher credit balances.
This comes on the heels of Q2 data, which saw the second-largest increase of credit card debt at $43 billion.
What’s causing delinquencies
The Fed doesn’t want to pin it on the labor market, as unemployment is still at historic lows. That leaves higher interest rates as a possible culprit. Higher rates hit harder for groups with the highest credit card balances, and those with auto and/or student loans.
On top of that, balances on mortgages and home equity lines of credit increased by $126 billion and $9 billion, respectively. These are the highest amounts of household debt held since 2008.
This will obviously put more pressure on households holding higher debt balances in general. Luckily, delinquency rates for mortgages and home equity lines of credit continued to remain near zero in aggregate.
What happens next
Historically, credit card delinquency rates rise in the third quarter and peak in the fourth quarter. They fall in Q1 and Q2 and repeat the cycle all over again. On one hand, there’s hope for stabilization here.
On the other hand, one reason for a pessimistic outlook for early 2024: the resumption of student loan payments in October 2023 after the Federal government’s three-year grace period. 43.6 million individuals hold Federal student loans with an average of $38,000 owed per borrower.
And as the government puts it, “elevated interest rates have strained the budgets of many credit union members. For many borrowers, the resumption of federal student loan payments represents an immediate, and in some cases substantial, payment stress due to the increase in their total monthly repayment requirements.”
What you do with this
Brace yourself by assuming that CAC, cancellations, and failed payments will rise over and through, at minimum, the next quarter.
Game out what you’re going to do if your acquisition models fall apart. If your churn creeps up. If you’re chasing down failed credit card payments.
Track your data closely. Be ready to put those contingency plans in place when the data speaks to you.