US Credit Card Debt Hit a New Two-Decade High
US — Despite the improving market sentiment — which saw the S&P 500 recover and close above the 4,000 level yesterday — the US economy continues its turbulent flow toward the fourth and last quarter of 2022. This is, however, highly anticipated due to the increased probability of continued tightening policy of the US Federal Reserve (Fed) at least until the first half of next year, 2023.
One of the typical consequences of a rising interest rate is the increased borrowing cost, be it corporate or retail. In fact, reports and data have recently revealed that mortgage rates have begun rising significantly. Worse, another major retail debt — credit card obligations — has just entered unchartered territory.
Video on US High Credit Card Debt: https://youtu.be/UNhfZFuC7wI
An Alarming Trend
According to the Federal Reserve Bank of New York, credit card balances grew by 15 percent in the third quarter Year-on-Year (YoY). This marks the biggest jump in more than 20 years. Hence, this exhibits that Americans, on average, are keeping a higher credit card debt balance as they struggle with high inflation in a tightening economic environment.
“With prices more than 8 percent higher than they were a year ago, it is perhaps unsurprising that balances are increasing,” Fed top economists expressed in the report. “Notably, credit card balances have grown at nearly double that rate since last year.”
In addition, Fed commentators have also echoed their concerns about the likelihood of delinquencies and late payments due to the massive spike in credit card balances since last year. “The real test will be to follow whether these borrowers will be able to continue to make the payments on their credit cards.”
Furthermore, the total credit card debt reached an astounding $930 billion in the third quarter alone. Ted Rossman, a senior industry analyst of CreditCards.com, has resounded the tricky economic dilemma that the economy is facing, saying, “High inflation and high interest rates are making it harder than ever to pay down credit card debt.”
The Harsh Reality We Are Facing
On the other hand, aside from the higher credit card balance, data from the Federal Reserve has also revealed that now more than ever, consumers are carrying their balances for more extended periods. Thus, this further indicates that more and more Americans are experiencing liquidity issues brought on by the challenging economic situation.
Meanwhile, according to CreditCards.com, out of all Americans who carry credit card debt from month to month, roughly 60% have been in debt for at least a year. This shocking revelation is a testament to a more economically sensitive portion of the population, further magnifying the adverse effect of the Fed’s rising policy rate.
“As the Federal Reserve increases its target federal funds rate, credit card annual percentage rates are also climbing.”
Lastly, New York Fed Researchers have also pointed out this economic disparity that shows less financially capable Americans are getting hit the hardest. “The Consumer Credit Panel sheds light on the more rapidly increasing debt burdens and delinquency of younger and less wealthy card holders, and may suggest disparate impacts of inflation.”
