As economic pressures mount, Americans are increasingly relying on credit cards, according to a new report.
Credit card balances rose $22 billion in the third quarter to a record $1.29 trillion, according to the New York Fed’s latest household debt report released Tuesday. The balance increased by 4.2% compared to the previous year.
Total household debt, including mortgages, auto loans and student loans, also increased by $334 billion in the July-September period to a record $19.1 trillion.
“Overall debt is increasing,” New York Fed researchers said at a press conference Tuesday. “This certainly reflects economic hardship.”
“One of the most expensive ways to borrow money”
The average credit card balance per consumer is now $6,678, an increase of 2.4% year-over-year, according to another credit industry insights report published quarterly by TransUnion. The number of people with credit cards increased by 2% from 174.8 million to 178 million.
Consumers often turn to credit cards, in part because they are more readily available than other types of loans, even though the average interest rate on new credit cards is around 24%, according to data from LendingTree. Credit card annual interest rates vary depending on the type of card, issuer, and creditworthiness of the borrower.
“Credit cards continue to be one of the most expensive forms of borrowing,” said Charlie Wise, TransUnion’s senior vice president of global research and consulting.
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New York Fed researchers said in a corresponding blog post that over time, an increasing share of new credit cards went to borrowers with lower incomes and lower credit scores, and “these accounts now exhibit higher levels of hardship.”
New York Fed researchers said in a press conference that credit card issuers loosened lending standards during the coronavirus pandemic, and delinquency rates rose in the years that followed.
“Macroeconomic headwinds of high inflation and rising borrowing costs are weighing on consumers, with inflation outpacing wage growth for low-income households,” the New York Fed said.
Meanwhile, the cost of living continues to rise, with Americans paying more for necessities like groceries and gasoline.
Stubborn inflation has been going on for years now, leaving many households in an affordability squeeze. The Bureau of Labor Statistics also reported Tuesday that the cost of goods and services again exceeded expectations in October.
“More people are taking on debt because of rising prices and rising interest rates,” said Ted Rothman, chief consumer finance analyst at Money Management International, a nonprofit credit counseling agency.
Balances continue to swell due to the pandemic, and even though the growth rate is now slower, “from a household perspective, it’s taking a huge toll,” Rothman said.
Kyle Moore, chief economist at the Century Foundation, a nonpartisan think tank, said the report came in the wake of the Democratic Party’s strong midterm results, and many voters expressed dissatisfaction with the U.S. economy.
“What united many of Tuesday’s results was the recognition that the American economy is failing American families,” Moore said, referring to Election Day.
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