Americans Find Silver Lining to Soaring Debt Delinquencies

Even as delinquencies on debts like credit cards and auto loans rise, Americans are experiencing record lows in third-party debt collections, a signal of resilience in consumer financial behavior.

The latest report from the New York Federal Reserve shows that while overall delinquencies have risen in the third quarter of 2023, there's a silver lining: third-party debt collections are at 20-year lows, at 4.69 percent.

It is a dichotomy that uncovers complexities of the current economic landscape, according to economists, where despite increased financial pressures, many Americans are managing to keep certain debts from falling into collections.

The New York Fed's Q3 Household Debt and Credit report paints a picture of American financial health with broad strokes. Overall delinquency rates increased in the third quarter, the New York Fed reported, with 3 percent of outstanding debt in some stage of delinquency, reflecting a 0.4 percentage point rise from the second quarter. Yet, the figure remains 1.7 percentage points lower than the last quarter of 2019, suggesting that Americans are faring better than during the pre-pandemic period in terms of keeping debts out of collections.

"Consumers were on fairly solid footing as they entered the final quarter of the year," LPL Financial chief economist Jeffrey Roach told Newsweek. The economist noted, though, that the rising use of credit does dampen some enthusiasm.

The decline in the number of consumers with third-party collections accounts is notable as it suggests an improvement in managing and resolving debts before they escalate. However, for those still within the grasp of collections, the stakes have risen; the average collection amount per person has swelled to over $1,600, the New York Fed found, hinting at more significant debts being pursued by collection agencies.

Contributing to the decline in third-party collections are recent policy changes that shifted the landscape of debt reporting. Medical bills under $500, which were once a primary driver of collections, no longer blemish credit reports. The change allowed consumers a reprieve from the potential cascade of financial consequences that typically follow a collection account.

The impact of medical bills on collections is relevant given the Fed's acknowledgment that a small fraction of collections stem from credit accounts, with the majority tied to medical and utility bills. Agencies like the Consumer Financial Protection Bureau (CFPB) are championing the cause to expunge all medical debt from credit reports.

Also aiding the slump in third-party collections is the student loan moratorium, as temporarily halting repayments kept many borrowers out of collections. With repayments resuming, it will take a year before any delinquencies begin to reflect on credit reports.

Analysts like Bankrate's Ted Rossman highlight that despite a backdrop of negative consumer sentiment, the practical reality of bill payments is more encouraging than one might infer. Americans, according to Rossman, are adapting to economic stressors with a determination to stay ahead of debt collectors.