Americans will end 2025 with more debt than ever before.
Credit card balances hit a new high in the fourth quarter, increasing by $44 billion to $1.28 trillion, according to a new report on household debt released Tuesday by the New York Fed. This is an increase of 5.5% compared to the same period last year.
The central bank’s monthly consumer expectations survey, released on Monday, also found fewer consumers expected their household finances to get better in a year’s time, and more expect their finances to get worse.
“Evidence consistent with a K-shaped economy”
Julpo | E+ | Getty Images
Credit card debt often mounts near the end of the year as consumers increase spending during the peak holiday shopping season. “Spending is trending fairly well given the conditions we’re seeing in the labor market,” New York Fed researchers said in a Tuesday press conference.
Although there are signs of strain in the job market, consumer spending has generally remained strong. However, other research shows that this is due to strong purchasing by high-end consumers.
“We see evidence consistent with a ‘K-shaped’ economy,” the New York Fed researchers said. “Some groups are really struggling.”
New York Fed researchers say it’s not just evident in the number of credit delinquencies on auto loans, credit cards, and mortgages. The researchers noted that the number of homeowners who are behind on their mortgage payments is increasing, and “this is also seen in rising mortgage delinquency rates.”
Fed researchers also found that overall, “the increase in delinquency rates was more pronounced in low-income areas.”
Affordability squeezes credit card debt
On the other hand, the average interest rate on credit cards is around 20%, making credit cards one of the most expensive ways to borrow money. About 175 million people in the U.S. currently own a credit card, and while some people pay their bills in full each month, about 60% of credit card users carry a balance by the end of the month, according to the New York Fed.
President Donald Trump’s call for a temporary 10% limit on credit cards could mean significantly lower interest fees for people with revolving debt. But banks and industry executives say they intend to fight credit card price controls, just as they successfully fought the Consumer Financial Protection Bureau’s efforts to cap card late fees last year.
More than half of consumers, 55%, carry credit card balances to cover essential expenses, according to a separate report from debt management firm Achieve released Monday.
A survey of 2,000 consumers found that many people who are in arrears are forced to choose between continuing to pay their debts and paying for basic necessities.
“This is what the K-shaped economy looks like in the real world. There is a wealthy half of the population whose financial life is not disrupted by temporary inconveniences. But for the rest of us, economic triage and tradeoffs are a way of life,” Achieve co-founder and co-CEO Andrew Houser said in a statement.
“The longer this situation lasts, the wider the gap will become,” he added.
Subscribe to CNBC on YouTube.
