Household Debt Climbs to a Record $18.6 Trillion as Delinquencies Rise

Total household debt in the U.S. was at $18.6 trillion as of the end of the third quarter, according to the New York Fed, and total household debt escalated by $197 billion from the previous quarter.

Most of this was attributed to mortgage debt and credit card debt. The percentage of debt that is delinquent was 4.5%. This is clear evidence that a growing number of families are having problems paying their debts.

This indicates that families have more obligations and fewer protections when it comes to repaying their debts. Subprime loan providers are faced with larger risk and smaller profit margins.

Debt Levels Keep Climbing

Mortgage debt totaled $13.07 trillion — an increase of $137 billion. Home-equity lines of credit extended their 14-quarter rise to $422 billion. That growth shows more homeowners drawing on equity for cash flow and debt consolidation.

Balances on credit cards increased $24 billion. Auto loans stayed near $1.66 trillion. Student debt added $15 billion. It now stands at $1.65 trillion.

Non-housing debt expanded by $49 billion in the quarter. Delinquencies are close to 4.5%. About 141,000 bankruptcies show up on credit reports right now.

Student Loan Stress Deepens

Student loan balances are at $1.65 trillion in the third quarter. The Fed reports that 9.4% of loans were 90 days or more past due. That rate remains near its highest point since the resumption of payments.

Since the resumptions of payments, the student loans market has faced an uphill battle, with balances and delinquency rates increasing steadily.

The payment resumption exposed households that relied on the pause to pay other debts. Missed student loan payments are now showing up on credit files. Many borrowers saw a drop in their credit scores that pushed them below prime ranges. The change makes risk scoring more difficult for near-prime lenders.

How Subprime Lenders Feel the Impact

Subprime lenders are among the first to suffer the brunt of increased balances and slower repayments. Increased losses shrivel margins on unsecured personal loans. They also hurt near-prime credit card portfolios.

Auto finance companies already report longer loan terms and smaller down payments — warning signs for future delinquency. The median credit score for newly originated auto loans held steady. But the tenth percentile score increased by nine points. This shows that lenders are avoiding the deepest subprime tiers.

Smaller lenders often use risk-based pricing. In the current environment, they will have to face tight funding as sources charge more. Many must rely on warehouse lines as well as asset-backed security markets.

Investors demand higher yields when defaults rise. Clearly, new deals will be threatened by fatter spreads. Some lenders will put in an extra effort to protect their capital by pausing originations and/or shortening loan maturities.

The tightening cycle also changes borrower access. Consumers with troubled credit will have to deal with decreased limits and increased interest rates. Rejection rates will increase, too. Credit-building progress will surely decrease as affordable products become less available.

Bottom Line

Debts are increasing along with repayment risk. Student loan distress adds fresh pressure to already fragile credit files. Nonprime borrowers face a tougher road as lenders increase prices and decrease exposure.

Record debt and cautious funding will precipitate a tougher credit landscape heading into next year. Lenders will also have to reconsider risk profiles on auto loans and credit cards. They will need to prepare for slower growth and stricter underwriting standards.