Nearly 20% of U.S. Families Are Missing Loan Payments, the Fed Says, in the Worst Reading Since 2010

The Federal Reserve has identified a warning sign it has not encountered since the aftermath of the 2008 financial crisis, even though stock prices and asset values still appear solid. The strain is showing up in household finances.

Nearly one in five American families said they were behind on a loan payment in the year before the Federal Reserve surveyed them. The central bank’s latest Survey of Consumer Finances found that 19.6% of families reported being late on payments in the survey year, up from 12.2% in the prior reading. The report described the jump as a sharp increase and said families were more likely to be behind on their financial obligations than at any point since the 2010 survey, when the country was still recovering from the financial crisis.

That comparison is important because the broader economy looked stronger at the time, with rising home values and a robust stock market. The Fed’s data suggest that national wealth and day-to-day finances are moving in different directions.

Falling Two Months Behind Signals Deeper Trouble

One missed payment can happen by accident. Being behind by two months usually points to a real cash shortfall. The share of families at least two months late climbed to 8.2%, up from 4.9% in the earlier survey.

Other measures in the Fed’s report point in the same direction:

• Heavy debt burdens: 8.6% of families spent more than 40% of their income on debt payments, a level last seen in the 2013 survey. In the earlier reading, the figure was 6.5%.
• Payday loans: 2.6% of families used one, compared with 2.1% in the earlier survey.
• Bankruptcy: 1.4% of families had declared bankruptcy in the previous five years.
• Fear of rejection: 13.5% of families did not apply for credit because they expected to be denied, up from 12.9%. The actual denial rate held at 10.1%.

The median indebted family now devotes 15.4% of income to debt service. The Fed says the increase may be linked to higher borrowing costs on mortgages and consumer loans.

Asset-Rich, Cash-Poor

The key contradiction in the report is that borrowers look stronger when measured against their assets, but weaker when measured against income. The median family’s debt amounted to 26.9% of assets, continuing a decline that has been underway since 2013.

The Fed offers two explanations. Some families saw their incomes fall. Others may have wealth tied up in assets that are not easy to tap quickly. A home that has risen in value or a 401(k) that has grown cannot be used to cover a car payment due soon. The report concludes that, despite the growth in family assets, some households may be less able to keep up with their loans.

That is the basic pattern: gains in wealth have often gone into homes and investment accounts, while bills are paid from paychecks, where the pressure shows up first.

What a Missed Payment Can Do to a Household

Most lenders report a payment to the credit bureaus once it is 30 days past due. That can sharply reduce a borrower’s score and keep the mark on a credit report for years. A lower score can lead to higher costs on future car loans, credit cards, or mortgage refinancing, meaning one late payment can raise borrowing costs long after the account is current again.

Signs to watch for in a personal budget include:

• Debt payments nearing 40% of pretax income, the threshold the Fed uses to flag especially heavy burdens.
• Making only minimum credit card payments while balances continue to grow.
• Using payday loans or credit cards to cover groceries or rent.
• Avoiding credit applications because you expect to be turned down.

What to Track Before the Next Update

The Fed conducts this survey only every three years, so the next clues will come from faster-moving data, including quarterly bank delinquency rates and the New York Fed’s household debt reports. If credit card and auto loan delinquencies continue to rise while incomes remain weak, the stress seen in the survey could begin weighing more broadly on consumer spending.