US Households, Consumers Drown In Credit Card Debt

US households and consumers are taking a beating as higher interest rates and persistently high inflation affect their incomes, forcing a greater number of people to rely on credit cards to meet their daily needs.

A study in November 2022 showed that 63% of Americans are living paycheck to paycheck. While this figure largely includes lower-income households, even higher-income individuals are struggling; 47% of individuals earning more than six figures are living paycheck to paycheck.

The Federal Reserve Bank of New York points to a consumer credit card crisis in the making. U.S. consumer credit card debt has jumped to nearly $1 trillion, while total household debt has increased by $394 billion, or 2.4%, to $16.90 trillion in the fourth quarter of 2022, the Federal Reserve Bank of New York said earlier this month.

Bank and retail credit card balances increased by $61 billion, the largest bump up in the history of the Fed data, which goes back to 1999, to $986 billion, surpassing the pre-pandemic high of $927 billion, even as the Fed shows no signs of letting up on raising rates to curb inflation. The combination of higher rates and credit card debt has curbed household budgets as families pay more for eggs, gasoline and basic goods.

“Credit card balances grew robustly in the 4th quarter, while mortgage and auto loan balances grew at a more moderate pace, reflecting activity consistent with pre-pandemic levels," Wilbert van der Klaauw, economic research advisor at the New York Fed, said in a statement.

"Although historically low unemployment has kept consumer's financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers' ability to repay their debts."

Credit cards are the most prevalent type of debt in the US, with more than 500 million open accounts. There are 191 million Americans with at least one credit card account, and many have multiple accounts. Half of all American adults have at least two cards, and 13% have five or more cards.

The average credit card interest rate of 20.34% on February 23, according to creditcard.com data. Until last year, the highest weekly average CreditCards.com had ever recorded was 17.8%. Interest expenses are also eating away at US personal savings.

Over the pandemic, American households accumulated about $2.3 trillion in savings in 2020 and through the summer of 2021, according to the Federal Reserve. Households have reduced at least one-quarter of these excess savings, as the saving rate had dropped below its pre-pandemic trend, the Fed said on October 21.

Despite this, US consumer sentiment improved in February for a third consecutive month. The University of Michigan said that its consumer sentiment index increased to 67.0 in February from 64.9 in January, exceeding its mid-month reading of 66.4 and the highest level since January 2022. Economists polled by The Wall Street Journal expected consumer confidence to be unchanged from the preliminary estimate of 66.4.

The improvement in sentiment, though, is still well below pre-Covid pandemic levels above 90 in the first three months of 2020. It also diverges from the fact that it isn’t only credit card debt that is on the rise across the US.

Mortgage balances rose to $11.92 trillion in the quarter, while auto loan balances hit $1.55 trillion, an increase of $28 billion in the fourth quarter, continuing the upward trajectory that has been in place since 2011, according to the Fed’s latest Quarterly Report on Household Debt and Credit.

Other balances, which include retail cards and other consumer loans, increased by $16 billion. Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter.

Balances on home equity lines of credit (HELOC) increased by $14 billion in the fourth quarter,, the third consecutive quarterly increase and the largest increase seen in more than a decade, according to the Fed. The outstanding HELOC balance stands at $336 billion, according to the Fed.

“The share of current debt transitioning into delinquency increased for nearly all debt types,” the Fed said in the report. According to the most recent delinquency data from the Fed, the 30-day delinquency rate rose from 2.09% to 2.25% in the fourth quarter of 2022.

That’s the fifth straight quarter of increases, keeping rates above 2% for the second straight quarter.