(Mike Maharrey, Money Metals News Service) Over the last several months, consumer credit data has suggested that Americans may have reached their credit limits. Now, there is further evidence of debt stress, as more consumers with high credit scores are falling behind on their credit card payments.

This is dreadful news for an economy that depends on consumers borrowing and spending money, and signals that it may not be as robust as some analysts claim.

The pace of new consumer borrowing has slowed to a crawl, and revolving debt, primarily made up of credit card balances, contracted in both May and June. (July data will come out early in September.)

Even with the contraction, Americans are still buried under $1.3 trillion in revolving debt.

The double whammy of rising debt and interest rates exacerbates the debt problem. The average annual percentage rate (APR) currently stands at 20.13 percent, with some companies still charging rates as high as 28 percent. The average is only slightly down from the record high of 20.79 percent set last August.

We’re seeing growing evidence that Americans are struggling under the burden of those debt payments.

LegalShield’s Consumer Stress Index (CSLI) increased by 4.4 percent in the second quarter and is at the highest level since November 2020, when the economy was shut down during the pandemic.

A LegalShield spokesperson said, “As consumers take on more credit to keep up with inflation and everyday expenses, many are hitting a breaking point. The increase in legal inquiries tied to foreclosures and personal finance issues suggests that debt-fueled spending is no longer sustainable for a growing number of Americans.” 

LegalShield’s Foreclosure Index surged 13.3 percent in Q2 and now stands nearly 29 percent higher than a year ago.

Meanwhile, according to Federal Reserve data, late-stage delinquencies on credit card debt ticked year-over-year in Q1. Meanwhile, 4.3 percent of total outstanding household debt is in some stage of delinquency. Serious delinquencies, defined as debts that are 90 or more days past due, rose to 2.8 percent of total debt, a 52 percent increase year-on-year.

Subprime credit card borrowers are struggling the most. According to credit scoring company VantageScore, the number of subprime borrower accounts over 90 days delinquent is up 109 percent year-on-year.

Consumers with the highest credit scores are also starting to fall behind.

According to VantageScore, there was a 47 percent year-on-year increase in late payments by people in the prime segment.

“Even though in absolute terms the increase is modest, it shows that even consumers considered the most credit-healthy are also beginning to see some stress with regard to repayments.”

Reuters noted that there has also been a “uptick” in auto loan and mortgage late-stage delinquencies. A VantageScore economist said, “Defaults on secured loans, such as mortgages, typically happen only when the pressure on finances is too much for the consumer to manage.”

The End of the Road?

Does the increasing consumer stress indicate that this bubble economy could be on its last legs?

It might.

As inflation surged in the wake of the monetary malfeasance of the pandemic era, Americans blew through their savings. Then they turned to credit cards. It wasn’t that people were buying more. They were just paying more, trying to keep up with surging price inflation. Once they blew through their savings, consumers were forced to finance life using Visa and Mastercard. Consumer debt surged from $4.15 trillion in 2020 to over $5 trillion today.

Now the bill is coming due, and Americans are tapped out.

Consumers may get a break from the Federal Reserve interest rate cuts. Fed chair Jerome Powell indicated that the central bank is close to further easing monetary policy. However, that’s no guarantee of relief. When the Fed cut in late 2023, credit card rates barely budged.

Furthermore, easing monetary policy means more monetary inflation, which may well drive consumer prices even higher.

The bottom line is that Americans have blown through the savings they accumulated during the pandemic and have run their credit cards close to the limit. An economy run on Visa and Mastercard simply isn’t sustainable. When Americans finally hit their credit limit, it will have major implications for economic growth.

Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.