Increased Credit Card Delinquency Rates Caused by Lenders Taking More Risk

The rate of delinquencies in the US has increased rapidly since 2021 due to the issuance of riskier credit cards, according to the Consumer Financial Protection Bureau (CFPB).

The CFPB suggested that the increased risk was caused by the loosening of lending standards in 2021 aligned with the pandemic which forced savings up and pushed credit scores up sharply.

Credit cards originating in 2021, 2022 and 2023 have gone delinquent much more rapidly than credit cards originated in other years, with the CFPB suggesting lenders were not aware that they were taking on additional risk and did not expect additional defaults.

This is because credit scores order borrowers by risk rather than by predicting a specific level of risk, and lenders who did not account for the change in score levels starting in 2020 may not have realized they were taking on more risk than the average credit scores.

Consumers with cash built up during the pandemic went delinquent much less frequently, pushing up average credit scores by 10 points delinquencies fell rapidly and credit card utilization fell.

As a result of substantially loosened lending standards, more people with a higher risk profile opened new credit cards, the CFPB said.

Delinquencies in 2024 were two percentage points higher than in 2019, which sparked concern about widespread consumer distress and that consumers may start reducing spending, leading to a general economic slowdown.