Total Credit Card Debt Reaches $1.13 Trillion
A report from the New York Federal Reserve published on Tuesday reveals that Americans are increasingly relying on credit cards to cover everyday expenses. In the last quarter of 2023, the total credit card debt rose to a record high of $1.13 trillion, representing a 4.6% increase of $50 billion from the previous quarter. This surge marks the highest level of credit card debt since 2003, highlighting a concerning trend of continuously rising debt.
Increase in Financial Struggles
Not only is there a surge in credit card debt, but there is also an increase in borrowers struggling to make payments on credit cards, student loans, and auto loans. As of December, about 3.1% of outstanding debt was in delinquency, up from the previous quarter’s 3%. However, it is important to note that this delinquency rate is still lower than the average rate of 4.7% before the COVID-19 pandemic started.
Wilbert van der Klaauw, an economic research advisor at the New York Fed, states that the rising delinquencies in credit card and auto loan payments indicate increased financial stress, particularly among younger and lower-income households.
Delinquencies Rising and Household Balance Sheets Weakening
Credit card delinquencies have continued to rise from their pandemic-era lows in the fourth quarter. The flow of debt moving into delinquency increased by 8.5% during the fourth quarter, compared to an 8.01% increase in the third quarter and 5.87% increase a year ago. The increase is most significant among individuals between the ages of 30 and 39, signaling potential challenges for household balance sheets and a slowdown in consumption as 2024 progresses.
Increase in Delinquencies among Younger Americans
Several factors contribute to the rise in delinquencies among younger Americans. Researchers at the New York Fed suggest that the increase may be due to the resumption of student loan payments or the tendency of this cohort to overextend themselves financially when they received stimulus payments during the pandemic. They also highlight the impact of the recession on people’s careers, especially early in their careers.
High Credit Card Interest Rates Compound Financial Stress
The rise in credit card usage and debt is particularly concerning because of astronomically high interest rates. The average credit card annual percentage rate (APR) reached a new record of 20.72%, surpassing the previous record of 19% in July 1991. This trend means that individuals carrying debt may end up paying more for items in the long run. For example, with the average American owing $5,000 in debt, it would take approximately 279 months and $8,124 in interest to pay off the debt by making minimum payments.
Overall Household Debt Reaches $17.5 Trillion
The increase in credit card debt contributes to a staggering total household debt of $17.5 trillion, representing a $212 billion (1.2%) increase from the end of October. Auto loan balances also experienced a significant uptick, rising by $12 billion in the fourth quarter to $1.6 trillion. Additionally, student loan debt increased by $2 billion, and mortgage balances jumped by $112 billion to $12.25 trillion.
Inflation Pressures Mount
This rise in debt coincides with the Federal Reserve’s efforts to combat inflation and cool the economy through aggressive interest rate hikes. Although inflation has slightly cooled in recent months, it remains at 3.4% compared to the same time last year. This spike in inflation has put financial pressure on U.S. households, particularly impacting low-income Americans who struggle with rising prices for necessities like food and rent.
The overall financial stress faced by Americans due to increasing credit card debt, rising delinquencies, and high inflation requires urgent attention to ensure the well-being of households, especially those in vulnerable financial situations.