Minneapolis
CNN
—
of the Americans credit card debt levels just hit a new, but unwanted, milestone: For the first time ever, they’ve passed $1 trillion, according to data released Tuesday by the Federal Reserve Bank of New York.
In the second quarter, credit card balances rose $45 billion, or nearly 4.6%, to $1.03 trillion, according to the New York Fed’s last Quarterly report on household debts and credits.
Rising credit card debt and car loans helped push total household debt levels up 1% to $17.06 trillion for the quarter, the report showed. Total household debt has increased by $2.9 trillion since the end of 2019, before the pandemic. New York Fed debt balances are nominal and not adjusted for inflation.
These increases come at a time when interest rates have risen rapidly to a 22-year high.
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“As interest rates move from the federal funds rate to mortgage and credit card rates, it affects everyday consumers,” Sofia Baig, an economist at policy intelligence firm Morning Consult, told CNN. “So with elevated interest rates, paying off that debt becomes more expensive, and with consumers continuing to take on more debt, this combination will put more pressure on some households that have the tighter budgets.”
The average credit card charges a near-record 20.53% interest rate, according to Bankrate.
Credit card balances have risen for five straight quarters and have increased at some of the fastest rates in 20 years, an analysis of New York Fed data shows.
“Unfortunately, it’s only going to go up from here,” Matt Schulz, chief credit analyst for LendingTree, said in an interview with CNN “What’s driving it is inflation, higher interest rates and generally how expensive life is in 2023.”
Although the labor market is strong, the economy is growing, and consumption increasesPersistently high inflation combined with rising interest rates has weighed on consumers — especially those who weren’t among the 14 million homeowners who refinanced during the pandemic, locking in ultra-low interest rates and extracting $430 billion in the process.
Earlier Tuesday, Bank of America reported that more people used their 401(k) accounts due to financial hardship. The number of people withdrawing in the second quarter increased from the first three months of the year to 15,950, a 36% increase from the second quarter of 2022.
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Americans have accumulated more than $1 trillion in credit card debt, according to recently released data from the Federal Reserve Bank of New York.
Although hardship withdrawals are made by a small fraction of overall plan holders, it is another indication that cracks may be forming in household financial situations.
“There’s a lot of data that shows people are doing really well, their debt compared to their disposable income is OK, defaults are low and unemployment is low,” Schulz said. “But there’s also only so much bad debt people can handle before delinquencies really add up.”
New defaults continue to climb from recent historic lows, according to the latest New York Fed report.
The rate of transitions into early delinquency for credit cards, auto loans and home loans rose during the quarter, according to New York Fed data smoothed as a four-quarter moving average. While the rate of new mortgage delinquencies is below what was seen before the pandemic, the moving averages for auto and credit card delinquencies are the highest since the first quarter of 2018 and the first quarter of 2012, respectively.
While these have picked up, they have not yet risen to a point where consumers are experiencing widespread financial distress, New York Fed researchers say wrote in a blog post.
“U.S. consumers have so far weathered the economic hardships during the pandemic and post-pandemic periods with resilience,” the researchers wrote. “However, rising balances can present challenges for some borrowers, and the resumption of student loan payments this fall could add additional financial strain to many student borrowers.”
Federal Student Loan Payments will resume in October after a more than three-year hiatus due to the covid-19 pandemic and the Biden administration’s push for debt forgiveness.
The Biden administration’s latest rollout of repayment programs should help soften the blow for borrowers, New York Fed researchers told reporters on Tuesday.
Still, not all finances are created equal, and it may be more difficult for some households to put back the monthly payment.
“It’s going to be a really big test for a lot of Americans,” Schulz said. “People are really, really tight. Once they start up, we just don’t know what it’s going to look like.”
As debt piles up, it will inevitably force people to rein in their spending even more, Morning Consult’s Baig said.
Consumers have already reduced spending or dipped into savings to cover expenses beyond their budgets, she said.
“I can see this behavior bleeding over into something like student loan repayment or credit card debt repayment,” she said. “If push comes to shove and you have to start paying back your student loan payments, I expect to see those consumers pull back on their spending to make it work.”
“What we’re going to see here is basically a change in behavior to survive,” she said.
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