Credit card defaults on rise as holiday bills come due

Americans are defaulting on their credit cards at the highest rate in nearly a year — and experts are blaming the improving economy.

Consumers are feeling more confident in their overall financial situations and they’re loosening their purse strings because of it, experts say. That confidence led to higher retail sales through the holiday season, but the credit card bills are coming due and people are leaving them unpaid at an alarming rate, according to S&P and Experian.

Another factor in the uptick in default rates is the increased willingness of financial institutions to extend credit to those who may struggle to pay it back.

Nationwide, the default rate was 0.91 percent in December.

It’s a tough time of year to pay down debt, because holiday bills are due but many families are also planning for spring and summer vacations, said Michael Foguth, founder of the Foguth Financial Group in Brighton, Mich. Foguth believes that more Americans are prioritizing vacations due to improving confidence about the economy, as well as spending more on smaller indulgences such as eating out. But the desire for date nights or a weeklong retreat are often too rich for consumer’s budgets, he said.

“The reality is, if your paycheck doesn’t support your spending, you’re going to default,” he said. Foguth thinks that social media has enhanced our desire to “keep up with the Joneses” — another reason we’re spending money we can’t afford.

“I call it the ‘Vegas syndrome,’” he said. “People always tell you how fun their vacation was, but they don’t tell you how much money they lost.”

But it’s not just an improving economy or the thrill of a getaway that is leading more people to rack up debt they can’t pay. Another

reason for rising credit card defaults, observers say, is that banks are loosening lending standards and making it easier for more people to get more credit. Consumers have taken advantage of that trend, run up their balances and run into trouble.

A lot of the borrowers who are opening up lines of credit now are “subprime” — those with bad or limited credit history or low credit scores — noted Bruce McClary, spokesman for the National Foundation for Credit Counseling, an organization that provides access to financial counseling services.

“I don’t think we’re ready to sound the crisis alarm right now, but it’s certainly something that deserves our attention,” he said of the rising defaults.

Subprime borrowers generally pay higher interest rates, so it tends to take them longer to pay back debt. And McClary said credit card interest rates should go up this year as the Federal Reserve raises the key federal funds rate.