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Americans have increasingly relied on credit cards to navigate financial challenges in the lead-up to summer. According to the New York Federal Reserve, aggregate credit card balances have now exceeded $1 trillion, a historic milestone.
During the period of April to June, total credit card debt increased by over $45 billion, representing a growth of more than 4%. This pushed the overall amount owed to $1.03 trillion, the highest value recorded by the Fed since 2003.
While overall household debt climbed by roughly $16 billion to reach a new record of $17.06 trillion, it was the surge in credit card indebtedness that stood out.
“Household budgets have seen temporary relief from saved funds and pandemic-driven debt relief measures in recent years, but the effects of these benefits are now waning,” explained Elizabeth Renter, a data analyst at personal finance site NerdWallet. “The rising trends in credit card delinquencies indicate that consumers are feeling the impact of high prices and lower savings compared to a few years back.”
As credit card usage increased, so did the delinquency rate.
In the second quarter, the Fed reported that the proportion of credit card debt 30 or more days overdue rose to 7.2%, up from 6.5% in Q1. This is the highest rate since Q1 2012, though central bank officials stated that it is relatively close to the long-term average. The overall debt delinquency rate also rose slightly to 3.18% from 3%.
“The second quarter saw a significant increase in credit card balances,” noted Joelle Scally, a regional economic principal at the New York Fed. “While delinquency rates have risen, they appear to have stabilized at pre-pandemic levels.”
The Fed’s researchers attribute the growth in credit card balances to both inflationary pressures and heightened consumer spending.
Regarding inflation, SMB Nikko Securities reports that household income, adjusted for inflation and taxes, is currently 9.1% lower than it was in April 2020. This adds additional strain on consumers.
“This presents a problem because the sustainability of consumers’ debt accumulation during the pandemic was predicated on their incomes steadily rising,” explained Troy Ludtka, a senior U.S. economist at SMBC Nikko. “However, the opposite has occurred, and now the rate of borrowers falling behind on debt payments has returned to pre-Covid levels. This could be the latest challenge faced by struggling commercial banks.”
The central bank also observed a decrease in the demand for new credit card issuance, which aligns with reports from banks indicating that credit standards are becoming stricter.
Debt levels in other categories experienced only modest changes. Newly originated mortgages rose to $393 billion, although total mortgage debt decreased slightly to just over $12 trillion. Auto loans increased by $20 billion, reaching $1.58 trillion, while student loans decreased to $1.57 trillion ahead of the moratorium on payments being lifted.
Correction: Newly originated mortgages rose to $393 billion. An earlier version misstated the change.
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