Amidst the backdrop of high inflation and rising interest rates, it is concerning to see that Americans are still accumulating debt at alarmingly high rates. What’s even more troubling is that recent research indicates a growing number of borrowers are struggling to meet their debt obligations, which poses a significant threat to their overall financial well-being.
According to the New York Federal Reserve’s Quarterly Report on Household Debt and Credit, although overall credit card debt decreased in the first quarter of 2024, which is typical after the holiday season, there has been an increase in the number of borrowers falling behind on credit card payments. Surprisingly, the delinquency rate has been consistently rising since 2021 and has now surpassed pre-pandemic levels.
The increase can be explained by focusing on the credit utilization rate, which measures how much of one’s available credit a borrower is currently using. According to the Fed, there is a strong correlation between utilization rate and delinquency, meaning that borrowers with a higher utilization rate are more likely to be late on their payments. For example, someone with a $10,000 credit limit and $4,000 in charges would have a utilization rate of 40%.
According to the Federal Reserve, although the nationwide utilization rate stands at approximately 30%, a significant 18% of borrowers are utilizing at least 90% of their available credit. This group, known as the “maxed out” borrowers, has seen a concerning increase in delinquencies, with roughly one-third of their balances becoming delinquent in the past year. Prior to the pandemic, this figure was less than a quarter.
Households are under increasing stress, especially those with limited financial resources. The research conducted by the Federal Reserve reveals that younger borrowers and individuals residing in lower-income areas are more likely to exhaust their credit card limits compared to those who maintain lower utilization rates. Specifically, 15.3% of Gen Z borrowers and 12.1% of millennials have reached their maximum credit card limit, while the figures stand at 9.6% for Gen X and 4.8% for baby boomers. It is important to note that Gen Z cardholders often have lower credit limits due to their shorter credit histories.
According to a recent study conducted by TransUnion, it has been found that Gen Z is beginning their journey into adulthood with higher credit card debt compared to previous generations. The research revealed that the average balance for individuals aged 22 to 24 was over $2,800 in the final quarter of 2023. In contrast, the average balance, adjusted for inflation, was approximately $2,250 in 2013. This indicates a significant increase in credit card debt among young adults today.
Debt growing at an ‘alarming’ pace
A new report from Achieve, a digital personal finance company, provides insights into the reasons behind the growth in credit card debt. The report surveyed 2,000 consumers with active accounts across various consumer debt categories, including mortgages, student loans, credit cards, auto loans, and home equity lines of credit. While the Fed’s research does not directly address the rise in utilization rate and delinquencies, this report sheds light on the factors contributing to the ongoing increase in credit card debt.
According to the survey, the primary reasons given by participants for failing to make timely payments were inflation, with 21% of respondents citing it as a factor, and a decrease in work and income, which was mentioned by 20% of respondents. Surprisingly, 11% of respondents admitted that they simply forgot to pay at least one bill over the course of the last six months. The report from TransUnion also highlights the impact of inflation on the rising debt levels.
Jason Laky, the executive vice president and head of financial services at TransUnion, stated in a press release for the report that it is not surprising to see younger consumers relying more on credit products to meet their financial needs in the current economic climate. He mentioned that the rising cost of living, compared to a decade ago, has led to this trend. Laky also emphasized that as long as inflation and the cost of goods remain high, credit balances are expected to keep increasing.
According to Achieve’s report, consumers also mentioned that the rise in credit card interest rates, which is a result of the Federal Reserve’s efforts to control inflation, has made it harder for them to pay off their debts.
Nearly 31% of consumers find it challenging to pay their recurring debts on time, according to a recent survey. As a consequence, 25% of consumers have had to cut back on their spending in the past three months. This trend is also reflected in the financial performance of major consumer goods companies like PepsiCo and Kraft Heinz, who have reported that rising inflation and interest rates are negatively impacting their lower-income customers.
“We are aware of the alarming rate at which household debt and credit are increasing,” stated Andrew Housser, Achieve’s co-founder and co-CEO, in a press release. “For numerous consumers, money is flowing out as fast as, if not faster than, it is coming in.”
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