Credit card debt in America soars to record $1 trillion

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Today we’re looking at new data by the Federal Reserve Bank of New York that finds Americans’ credit card debt has surpassed $1 trillion for the first time.

WHAT’S HAPPENING:?

• Credit card balances shot up by $45 billion during the second quarter – about 4.6% – to hit $1.03 trillion, New York Fed’s latest Quarterly Report on Household Debt and Credit shows.
• Add auto loan balances to the mix and household debt levels are up 1%, to $17.06 trillion. Overall household debt has spiked by $2.9 trillion since the end of 2019. In financial speak, the New York Fed’s debt balances are nominal and not adjusted for inflation.

HOW INTEREST RATES FACTOR IN:

• Debt increases come as interest rates have quickly vaulted to a 22-year high. The average credit card now charges a near-record 20.53% interest rate, according to Bankrate.
• “With elevated interest rates, paying that debt becomes more expensive, and with consumers continuing to take on more debt, this combination will put more pressure on some households who have those tighter budgets,” economist Sofia Baig tells CNN.
• “Unfortunately, it’s only going to go up from here,” warns Matt Schulz, chief credit analyst for LendingTree. “What’s driving it is inflation, higher interest rates and just generally how expensive life is in 2023.”

BIG PICTURE OF HOUSEHOLD FINANCES:

• Higher rates of borrowers became delinquent on their credit card, auto and mortgage payments for the quarter, according to the Fed data. Mortgage delinquency is below pre-pandemic rates, but auto and credit card delinquency averages are the highest since 2018 and 2012, respectively.
• Despite those increases, delinquencies have not yet risen to a point where consumers are experiencing widespread financial distress, New York Fed researchers say.
• But some cracks may be forming. On Tuesday, we told you about a report that more people are tapping into their 401(k) accounts because of financial distress. While there’s plenty of data showing many Americans are doing well, “there’s also only so much hard debt that people can handle before delinquencies really spike,” Schulz says.
• The New York Fed itself cautions that “rising balances may present challenges for some borrowers, and the resumption of student loan payments this fall may add” financial strain. When debt piles up, it’ll inevitably force people to rein in their spending – “a change in behavior in order to survive,” Baig says. Some consumers have already pulled back or dipped into savings.

Are you struggling with ballooning credit card debt? Have you found a strategy to use credit cards to your advantage? Share your stories in the comments. Then check out this guide from CNN Business on what to do with your credit card debt as the Fed keeps raising rates.

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