As lower-income households struggle to pay up their debts, banks are increasingly withholding auto and credit card financing from them.

Major banks, including Bank of America, Chase, Citigroup and Wells Fargo, have all reported rising net-charge offs in their latest quarterly reports, representing debts that borrowers are unlikely to ever repay.

Meanwhile, Bank of America has observed “cracks” in the financial health of consumers whose credit scores are below prime.

U.S. Bancorp executive Arijit Roy told Reuters that default rates for first-time and low-income borrowers are rising faster than for higher-income households.

Meanwhile, Chicago Fed presidernt Austan Goolsbee says rising charge-offs are the calm before the storm,

"If the delinquency rate of consumer loans starts rising, that is often a leading indicator things are about to get worse,” said economist Austan Goolsbee.

In response, banks are increasingly tightening lending standards and rising borrowing costs, according to the Dallas Fed.

That means financing for auto loans and credit cards have become harder to come by, especially for low-income families who present a greater risk to lenders.

A closer look at credit card delinquencies

Between 2020 and 2023, credit card charge-offs jumped from $32.98 billion to $42.73 billion, according to WalletHub data.

At 10%, credit card delinquency rates were highest among young Americans between the ages of 18 and 29, followed by the 30-39 age bracket at 9%, as of Q4 2023.

In addition to rising rates, the main reason borrowers are in arrears on their debt payments is because their pay isn't catching up with inflation.

Conditions aren’t showing any signs of improving after consumer prices increased 3.5% year-over-year in March.

A growing percentage of Americans are also considered income-constrained, meaning they struggle to afford the basics of healthcare, transportation, and housing.

According to the United Way, nearly one-third (29%) of households fall into this category.

While these families are living above the poverty line today, they’re not earning enough to make ends meet. Another 11.5% of the U.S. population is living below the poverty line.

With no relief, consumers are turning to their credit cards and depleting any savings they managed to accumulate during the pandemic.

Uncertain economic times

Although interest rate cuts seemed like a done deal at the beginning of the year, the Fed has yet to pull the trigger.

With mixed signals from inflation, experts think borrowers shouldn't expect a reprieve anytime soon because multiple, if any, cuts are unlikely this year.

Meanwhile, banks have gone on the defensive to protect themselves against high borrowing costs.

In the fourth quarter of 2023, banks tightened lending standards for households across segments, including mortgages, credit cards, and auto loans.

Some examples of credit tightening affecting lower-income consumers include premiums attached to risky loans, as well as higher collateral requirements."

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