More Americans are falling behind on credit card bills
More Americans are falling behind on their credit card bills.
About 8.9% of credit card balances fell into delinquency over the last year, according to the Federal Reserve Bank of New York — a sign that a growing number of borrowers are feeling the strain of rising prices and high interest rates.
"Everything is more expensive. Debt is more expensive. Rent is more expensive. Food, gas, everything," says Charlie Wise, senior vice president at TransUnion, the credit reporting firm. "Even with relatively healthy wage gains we've seen over last several years, many consumers just aren't keeping up with the price pressures."
Maxed-out borrowers are a big concern
The New York Fed's report shows the pain is not evenly spread. While many households are on solid financial footing, almost 1 in 5 cardholders is "maxed out," using at least 90% of their credit card limit. That's worrisome, the report says, because maxed-out borrowers are much more likely to fall behind on their bills.
People under 30 and those who live in low-income neighborhoods were particularly likely to be maxed out, according to the report. Among Generation Z borrowers, about 1 in 6 was close to exhausting their credit, compared with 4.8% of baby boomers.
Trapped in an expensive debt cycle
Overall credit card balances totaled $1.115 trillion in the first quarter of the year, $129 billion more than last year. For card users who pay their balance in full every month, that's not a problem. But according to Bankrate, roughly 44% of borrowers carry credit card debt over from month to month.
"The credit card market is really one of these proverbial tale of two cities," says Ted Rossman, senior industry analyst at Bankrate. "You have roughly half of cardholders paying in full and getting great benefits like rewards and buyer protections. And then you have the other half, more or less, who can easily become trapped in an expensive debt cycle."
Credit card debt is very costly, with the average interest rate topping 20%. Rossman says borrowers who make only the minimum monthly payment can take nearly two decades to pay down their debt. On an average balance of $6,360, the interest alone would total $9,500.
"Time is not your friend if you're a consumer who's struggling with debt," says Mike Croxson, CEO of the National Foundation for Credit Counseling. "Odds are as you go through paying minimums, missing minimum payments and other things, those rates are going to continue to increase."
Credit card delinquency rates are rising
Early in the COVID-19 pandemic, when spending opportunities were limited and the federal government was sending out relief payments, many people paid down their debts, and credit card delinquencies fell to historical lows.
That trend has now reversed itself. Credit card delinquencies have returned to pre-pandemic levels, despite rising wages and a low unemployment rate.
Rising rates of delinquency when both the labor market and the economy are strong are raising concerns at the New York Fed. It's a worrisome trend it will keep an eye on for months to come.
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Transcript
JUANA SUMMERS, HOST:
More Americans are falling behind on their credit card bills. That is a sign of the growing financial stress caused by rising prices and today's high interest rates. That warning comes from a new report from the Federal Reserve Bank of New York. NPR's Scott Horsley joins us now with the details. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Juana.
SUMMERS: So, Scott, tell me. How deep of a hole are we digging for ourselves with these high credit card balances?
HORSLEY: Some deeper than others. As of the first quarter of the year, Americans were carrying a total of just over a trillion dollars in credit card debt. That's about $130 billion more than we had a year ago. Now, for most people, that's not a big issue, but about 1 in 5 credit card users was maxed out, meaning they were using 90% or more of their personal credit limit. Now, that's worrisome because researchers at the New York Fed say maxed-out borrowers are much more likely to fall behind on their payments. So why are some borrowers piling on the credit card debt? Charlie Wise, who's a senior vice president at TransUnion, the big credit reporting company, thinks a big part of it is inflation.
CHARLIE WISE: Everything is more expensive. Debt is more expensive. Rent is more expensive - food, gas, everything. And for many consumers, even with relatively healthy wage gains we've seen over the last several years, many consumers just aren't keeping up with the price pressures.
HORSLEY: This is a turnaround from what we saw early in the pandemic, when, of course, a lot of people paid down their debts and built up savings. Back then, a lot of spending was off limits. The government was sending out relief payments. That's all changed now. And the rise in credit card delinquencies is a sign of that growing financial stress.
SUMMERS: OK. Well, what can you tell us about who's falling behind? Do we know any details about what particular groups may be at most risk?
HORSLEY: The New York Fed says people under 30 and lower-income families are the most likely to be maxed out and fall behind on their credit card bills. We know from other reports that renters have seen a much bigger rise in debt payments in the last three years than homeowners, who, for example, locked in low-rate mortgages. According to Bankrate, a little over half of all credit card users pay their balance in full every month. So Bankrate's Ted Rossman says it's the other half, those who carry a balance from month to month, who are most likely to get into trouble.
TED ROSSMAN: The credit card market is really one of these proverbial tale of two cities where you have roughly half of cardholders paying in full and getting great benefits like rewards and buyer protections. And then you have the other half, more or less, who can easily become trapped in an expensive debt cycle.
HORSLEY: Keep in mind the average interest rate on credit cards is over 20% right now. So if you're carrying a balance, that's very expensive. The average credit card balance is about $6,300. And Rossman says if you only make the minimum monthly payment, you'll pay more than $9,000 in interest.
SUMMERS: That is a lot of interest. Wow. OK, so falling behind on a credit card bill is obviously something that's hard for an individual or a family's budget. But let's talk big picture here. Is it also troubling for the broader economy?
HORSLEY: The companies issuing these credit cards don't seem too worried. They're still making money. But this is an economy that runs on consumer spending. And while a lot of spending is bankrolled by rising wages and other income, some of it is going on credit cards, and that may not be sustainable. Mike Croxson heads the National Foundation for Credit Counseling, which helps people get out of debt. His clients are kind of an early warning sign of the risk of - anyone might face if they're living maxed out.
MIKE CROXSON: They are living paycheck to paycheck, but something happens. A car breaks down. A kid gets a broken arm. Something happens where a big expense occurs, and they don't know what to do, and they turn for help.
HORSLEY: And we're seeing this at a time when, you know, the job market's strong. Unemployment is under 4%. You have to ask yourself, if people are stretched thin now, what happens if the job market weakens?
SUMMERS: That's NPR's Scott Horsley. Scott, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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