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Why more borrowers are falling behind on their credit cards

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More U.S. consumers are likely to fall behind on their credit card and car payments next year because of rising interest rates and increased lending to subprime borrowers.

That forecast, from credit reporting bureau TransUnion, comes as delinquency rates are inching up. Still, the rise in late payments is not alarming, remaining well below their highs during the financnial crisis, notes Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit.

“Yes, it’s important to understand that the trajectory is going up,” she said. “These surges in delinquencies are not the same as to what you would expect from a bubble.… These are actual natural consequences of [increased] credit access available to subprime borrowers.”

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According to TransUnion, the percentage of credit card accounts held by subprime borrowers is at its highest level since 2010. In addition, percentage of car loans held by people with weak credit is at its highest point since 2013, a trend that worries some economists. The Federal Reserve Bank of New York recently estimated that at least 1 million people are at least 90 days late on their car payments.

“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,”  New York Fed economists wrote in a recent blog post.

Verma notes that there are key differences between the auto market and the real estate sector, which imploded during the housing crash. For one thing, the value of motor vehicles doesn’t fluctuate as wildly as homes. “We are not expecting those dynamics ever to occur in the auto finance market,” she said.

The relative strength of the U.S. economy may also help some borrowers. Economic growth between July and September rose at its fastest rate in two years, while unemployment in November fell to 4.6 percent, its lowest level since 2007. Home prices are also continuing to rise. TransUnion data show that mortgage delinquency rates have fallen more than 60 percent over the past five years.

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