The current state of credit risk

This year, the rates of auto loan and credit card delinquencies have reached the highest level of the decade. Credit risk is rising, and economic uncertainty is high. Senior Economist Dawit Kebede breaks down the numbers in this month’s Economic Update.

“For credit union auto loans, 60-day delinquencies have reached levels we haven't seen since before the pandemic. Credit card delinquencies are even worse. They're now higher than what we saw during the Great Recession.”

What about charge-offs?

90-day delinquencies are early indicators for charge-offs. The good news is both credit card and auto loan 90-day delinquencies are lower than expected. However, they are still rising, increasing credit risk for credit unions.

Loan performance by origination year

Loans made in 2022 or later are doing worse than older loans. The Federal Reserve had a near-zero interest-rate policy until March of 2022. The Federal Reserve started raising interest rates in Q2 2022, but strong consumer demand after the pandemic and the rush to get ahead of rising rates led to a record high loan growth rate in credit union history. This means many loans consumers borrowed after 2022 had higher interest rates than pandemic-era loans. While all of this points to increasing credit risk, the good news is payment on many loans are stabilizing around two years after those loans were made.

The impact of credit score boosts

During the pandemic, the federal government gave stimulus payments. Many consumers, especially ones struggling with debt, used the money to pay down loans. This caused credit scores to rise during the pandemic. That effect is wearing off. Around half of auto loans in 2022 and 2023 were made to consumers with credit scores of 720 or above. Today, 20 percent of those consumers have dropped below 720.

What now?

Even though delinquencies are coming down from their high level at the beginning of the year, there are many factors that could cause credit risk to increase. The U.S. labor market currently is in a period of low unemployment rate, but new hiring has slowed down significantly during the summer. If weakness in the labor market transitions from poor hiring to layoffs leading to a rise in unemployment, that would lead to higher delinquency rates. Consumers usually pay their mortgage or rent first, and their credit cards last during tough times. Rising cost of living can also make matters worse. Credit union members may be forced to make difficult decisions with which bills they will pay.

While credit risk is higher than it has been, credit union members have shown resilience and continue to make payments better than borrowers at other lending institutions.

Find all the Economic Updates and access data and tools to help you tell your credit union story.