There is no question that there is turmoil going in geo-political circles as I type, and the financial markets are engaging in a bit of roller coaster activity. So, as the airwaves are full of talking heads saying the weakness in equities is the start of a 40% downward spike OR this is currently a normal and healthy correction, another quieter but insidious force is gathering momentum.
I am referring to the growing struggles among the bottom 20-30% of American households. This past week, the media gave fair coverage to new data that showed that 6.6% of subprime borrowers (credit score under 640) are some 60 days overdue on their car loans. This is the highest number since Firth ratings began tracking this statistic in 1994.
The Federal Reserve Bank of New York weighed in and reported that through December 2024, some 3% of subprime borrowers were 90 days past due which is the highest level since 2010 when we were beginning to emerge from the Great Recession.
The tariffs on autos and auto-parts that seem likely to kick in soon may really hurt the subprime borrowers as projections are, that if enacted as they currently stand, new car prices will increase by $4-10 thousand dollars depending on make and model. It would appear that used car prices would spike upward under that scenario.
Even prime borrowers with excellent credit are feeling a bit squeezed as .39% are 60 days past due. The average car loan payment is about $755 per month to this group.
What about credit card debt? Mark Zandi of Moody’s Analytics described the bottom third of US households as “tapped out”.
The Federal Reserve of New York concurs stating that those making only minimum payments on their credit cards are at a 12-year high. Big deal, you might say? Well, if you have a credit card balance of $8,000 at 18% and never make another charge on that account and dutifully pay the minimum amount each month it will take many years to pay off that charge. And today, many subprime borrowers are paying 21-22% interest. Also, if you may only pay minimum payments the odds are overwhelming that you will have a cash poor month here and there and add to the balance only extending the payback period.
This appears to be happening more and more. Also, there has been an uptick in recent months on credit card balances that have been “charged off.” What this means is that the debt has been so seriously delinquent (often about six months) that the lender has given up on collection. Usually, they sell the loan to a debt collection agency for pennies on the dollar.
This is a serious issue. The person owing the money remains legally responsible for the debt. Your credit score automatically drops 100 points. More damning, this “write off” lasts on your credit report for seven years. Try to get a car loan, an apartment lease or new credit card. Difficult. You may get a new card but at a very high rate of interest so the horrible cycle may well begin again.
So, many Americans are struggling. They all cannot be dismissed as deadbeats or lazy. Many are hardworking people who are having a difficult time dealing with the current environment. With credit cards, it seems to occur after four years of running up a balance. People who only pay the minimum payment each month eventually get to a point where, with interest charges compounding, they can no longer pay the minimum.
The media does not discuss this increasingly large group of Americans who cannot manage to live within their means. If we do have a recession this year or next, their numbers will swell especially if one member of the household becomes unemployed. It is a serious issue that gets too little attention.
Despite this downbeat post, I wish all my fellow Irish Americans a Happy St. Patrick’s Day! If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
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