The default rate for first mortgages was 0.72% in January – up from 0.71% in December but down from 0.84% in January 2016, according to the S&P/Experian Consumer Credit Default Indices.
The default rate for second mortgages was 0.48%, up from 0.41% in December but down significantly from 0.65% in January 2016.
In keeping with the typical seasonal pattern, the default rate for credit cards was 3.21%, up significantly from 2.95% in December and up from 2.52% in January 2016.
The default rate for auto loans was 1.06%, up from 1.03% in December and up from 1.04% in January 2016.
Although the increase in credit card defaults is common following the holiday season, this year, it spiked up more than expected. In fact, according to The Nilson Report, a card and mobile payment trade publication, outstanding credit card debt topped $1 trillion at the end of 2016, which is close to where it was when the Great Recession first hit in 2008.
This should be of some concern for mortgage lenders, as credit card debt carries much higher interest and is, therefore, harder to pay down.
“While consumer credit default rates on mortgages and auto loans remain low and stable, default rates on bank cards have popped up to the highest level seen since July 2013,” says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, in a statement. “Recent data point to consumer optimism: Retail sales rose 5.5 percent in January compared to a year earlier, consumer sentiment measures rose over the last two years, and employment and labor market conditions are favorable.”
So, is it a good thing or a bad thing that consumers are borrowing money? It depends on one’s perspective.
“Current default levels do not present any immediate concerns for the economy,” Blitzer says. “During 2004-2006, a period of strong retail sales and consumer spending, bank card defaults were higher than today. Moreover, even if interest rates were to increase much faster than the Fed or most analysts currently expect, the cost of borrowing money is unlikely to create problems for consumers. The weak spot, if there is one, would come with a rise in unemployment and an economic downturn.”