American households are feeling the squeeze like never before as household debt and credit conditions continue to deteriorate. A recent analysis reveals a $430 billion refinancing boom, highlighting the growing need for consumers to manage their debts amid rising costs. Then came the Covid-19 pandemic, which upended the financial landscape. Over half of all consumers say they can’t pay all their bills, driving consumer sentiment to a level only seen during the Great Recession.
Now, as of September 2023, the country is witnessing a new and worrying trend—an alarming increase in serious delinquencies. Households are being increasingly crushed by financial strain, with delinquencies on auto loans and credit cards reaching a 14 year high. This alarming trend reflects that more consumers are not keeping up with their payment obligations. Student loan delinquencies reached a false peak of 7.74%. That’s a huge jump, considering that just 1% were paying upfront, even prior to the end of the pandemic-era payment pause.
It’s likely that millions of borrowers facing repayment for the first time as of this September are overwhelmed with new expectations and responsibilities. Borrowers already struggling have been left in an even more vulnerable state. The one-year “on-ramp” provision was intended to protect borrowers from the consequences of default on missed payments. The pinch in this place is apparent.
“Adding student loans back into the mix certainly looks like it was a bridge too far for a lot of people when it comes to their ability to pay the bills down,” stated Matt Schulz, chief credit analyst at LendingTree.
The Covid-19 pandemic temporarily extended consumers a reprieve. They responded to stimulus payments and payment suspensions by reducing their debts and accruing savings. Yet as these pandemic-era financial cushions disappear, household finances are looking more and more like a house of cards. Defaulted borrowers with credit scores above 620 experienced average declines greater than 140 points. In sharp contrast, test takers who scored higher than 720 saw their declines be even sharper—an average of 177 points.
As American consumers continue to deal with inflationary pressures and the resumption of student loan repayments, their mood is increasingly pessimistic. The university’s index of consumer sentiment has declined by almost 30% since January. This trend has made so many Americans defenseless in the wake of recession.
“If consumers are watching the headlines to shape their sentiment, they’re most likely feeling like deer in headlights — unable to move for fear the car may swerve at the last minute,” warned Elizabeth Renter, NerdWallet’s senior economist.
The need to address these financial pressures goes beyond student loans and credit card debts. Almost 50% of BNPL users experienced at least one issue. The biggest violation reported was overspending. This major change in how consumers behave exposes a shocking pattern. An increasing number of consumers are even using BNPL for necessities, including food.
“That hints that people are looking for whatever way they can to extend their budgets in the face of higher interest rates, higher prices at the grocery store and elsewhere, student loan repayments, and just other economic headwinds people are facing,” Schulz added.
Consumer spending is driving the U.S. economy right now. At the same time, Americans are going increasingly in debt as they attempt to keep up with their lives. Growing fiscal headwinds risk to upend the soft landing many families just barely secured after years of tumult. These setbacks are particularly troubling given the context of the pandemic’s early days.