By Tom Ozimek
Americans have amassed a record amount of credit card debt, which over the past year rose by $154 billion, the biggest annual jump in history, suggesting consumers are increasingly having to borrow to prop up their spending.
The Federal Reserve Bank of New York released its quarterly household debt and credit report on Nov. 7, which shows that overall household debt rose by 1.3 percent in the third quarter, hitting a record $17.29 trillion.
Of that, credit card debt rose in the third quarter by $48 billion, marking the eighth quarter of consecutive year-over-year increases. The increase brings the total U.S. credit card debt to a whopping $1.079 trillion—a record high.
Ted Rossman, senior industry analyst at Bankrate, told The Epoch Times in an emailed statement that key contributors to the trend of rising credit card balances are high inflation and record-high credit card rates.
“There’s a take on this which reflects economic growth, increased credit card usage (as cash becomes less and less popular every year), population growth, more e-commerce and so on,” he said. “The biggest key, at the household level, is whether or not you pay your credit cards in full each month.”
Unfortunately for American consumers, the rise in household debt levels has been accompanied by a jump in defaults for most credit product types—with credit card debt defaults topping the delinquency charts.
Credit Card Delinquencies Soar
The percentage of credit card debt that transitioned into serious delinquency (defined as 90 or more days delinquent) rose from 3.69 percent in the third quarter of last year to 5.78 percent in the third quarter of this year, according to dat from the New York Fed.
The sharp jump in credit card debt-delinquency transition rates is the largest increase of all credit product types. It’s more than double the next highest, which is auto loans—2.02 percent flow into serious delinquency in the third quarter of 2022 compared to 2.53 percent in the third quarter of 2023.
“Credit card balances experienced a large jump in the third quarter, consistent with strong consumer spending and real GDP growth,” Donghoon Lee, economic research adviser at the New York Fed, said in a statement. “The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans.”
Mr. Rossman told The Epoch Times that Bankrate research shows that 47 percent of credit cardholders carry debt from month to month, up from 39 percent two years ago. He added that 60 percent of Americans with credit card debt have been in credit card debt for at least a year, up from 50 percent two years ago.
“All of that is worrisome in the context of higher debt loads and high interest rates,” he said. “Basically, for every person who’s using credit cards for convenience and to earn cash back and travel rewards without paying interest, there’s someone else who’s carrying a very expensive balance.”
A recent report from Bankrate showed that interest rates on retail credit cards have soared to an average of 28.93 percent, the highest level on record. In 2022, that rate was 26.72 percent, while in 2021, it stood at 24.35 percent.
The New York Fed’s household debt report also showed that aggregate delinquency rates increased in the third quarter, with 3 percent of all outstanding household debt in some stage of delinquency at the end of September.
Analysts from the New York Fed said in a blog post that it’s difficult to pin down the exact reason for the rising delinquency rates, which have been going up for nearly all types of credit products since the middle of 2021.
However, they suggested it could be due to “shifts in lending, overextension, or deeper economic distress associated with higher borrowing costs and price pressures,” issues that have been a known problem for some time, as high inflation has forced the Fed to hike rates, raising borrowing costs.
An important question is whether the jump in household debt delinquency transition rates (which rose for all types of credit products except home equity lines of credit and student loans) means tough times ahead for the all-important measure of consumer spending, which so far has remained surprisingly robust.
Consumer spending, which accounts for roughly two-thirds of U.S. economic output, rose 0.7 percent in September, the latest month of available data, according to the Commerce Department. Economists polled by Reuters expected a 0.5 percent rise.
Even though personal income rose 0.3 percent in September, when accounting for inflation and taxes, it dropped for the third straight month.
“That is not sustainable,” James Knightley, chief international economist at ING in New York, told Reuters. “Savings are finite and are being exhausted at a rapid rate, with various estimates suggesting that excess savings accrued during the pandemic could be exhausted in the first half of next year.”
Debt-Level ‘Breaking Point’
With household debt breaking above $17 trillion in the second quarter—and now nearing $17.3 trillion in the third—concerns have been raised about debt sustainability.
A study by WalletHub carried out at the end of the second quarter indicated that the average American household was just over $14,000 away from reaching a “breaking point” at which it will be unable to continue paying off loans.
The average U.S. household owed a total of $143,762 at the end of the second quarter, which was a little over $14,000 below WalletHub’s projected “breaking point” for household finances, which is a point at which people can’t keep up with paying their bills.
“Based on our analysis of debt during the Great Recession, the average household is about $14,339 away from truly having to worry about defaulting,” Jill Gonzalez, WalletHub analyst, told The Epoch Times in an earlier emailed statement.
She explained that the “breaking point” for household debt level sustainability is based on a range of factors, including the debt-to-income ratio, the household’s disposable income, the interest payments, and credit utilization.
“Basically, we’re taking into consideration everything that contributes to the household’s total debt and pinpointing when this debt is no longer manageable,” Ms. Gonzalez told The Epoch Times.
While Wallethub has yet to revise its “breaking point” household debt estimates based on the newly released New York Fed data, the fact that Americans have fallen deeper in debt in the third quarter means they’re inching closer to being unable to pay all their bills.