The resilient consumer has kept America’s economic engine running, but it comes at a great cost: Americans are racking up record credit card balances, and more and more are falling behind on those payments.
During the third quarter, credit card balances reached a new high of $1.08 trillion, up $48 billion from the previous quarter and jumping by a record $148 billion from a year earlier, according to the Federal Reserve Bank of New York’s latest quarterly report on household debt. . The credit was released on Tuesday.
The year-over-year increase is the largest since the Federal Reserve Bank of New York began tracking that data in 1999.
Household debt rose 1.3% to $17.29 trillion in the third quarter.
However, a growing number of households are having difficulty coping with this debt, which is becoming increasingly more expensive amid an environment of persistently painful inflation and rising interest rates.
The latest data also showed that the rate of families who became delinquent in payments or entered a serious delinquency phase (after 90 days or more) on their credit cards was the highest since the end of 2011.
“I think economic inequality is continuing to grow, and that’s something that has really accelerated in recent years,” Ted Rossman, senior industry analyst at Bankrate, told CNN.
He added that delinquencies on high-risk car loans are now worse than they were during the financial crisis, and attributed this to the rise in car prices. In addition, more people are financing daily necessities with credit cards, he added.
“I think pockets of problems are starting to emerge,” he added.
Recently delinquent auto loan balances also continued to rise, with transitions into severe delinquencies reaching their highest levels in 13 years, the survey data showed.
“Credit card balances saw a significant jump in the third quarter, consistent with strong consumer spending and real GDP growth,” Donghun Lee, an economic research adviser at the Federal Reserve Bank of New York, said in a statement. “The continuing rise in credit card delinquency rates is widespread across income and region regions, but is particularly pronounced among Millennials and those with car loans or student loans.”
The spike in the number of households moving into delinquency is “surprising” and “unusual,” given the relative strength of the economy and labor market, New York Fed researchers said. They plan to dig deeper into possible causes when conducting future surveys, but said the increase could be attributed to changes in lending standards, consumers over-extending themselves or a sign of “real financial stress.”
However, thanks to high-quality mortgage loans, overall delinquencies remain below pre-pandemic levels, researchers from the Federal Reserve Bank of New York said.
“Since then, it’s been a very steep upward line,” Rossman said. “I definitely think high inflation and high credit card rates are big contributing factors here.”
“This report does not differentiate between what is paid in full and what is not, which is roughly half and half in terms of the number of cardholders who pay in full versus those who carry debt from month to month,” he said.
High balances could also be a reflection of population growth, rising e-commerce and a strong economy, he said.
He pointed out that “it’s not all bad.”
Mortgage originations fell to $386.37 billion, continuing a much lower period of high housing activity in 2020 and 2021. This year is on pace to achieve the lowest construction values since 2014, New York Federal Reserve data show.
Even if consumers are in a strong enough financial position to buy a home, many of them don’t pull the trigger, according to a new survey released Tuesday by mortgage giant Fannie Mae. About 85% of respondents said it was a “bad time” to buy a home, citing rising prices and mortgage rates.
Home prices in September rose year over year for the third straight month, according to the National Association of Realtors. The average interest rate on a 30-year fixed-rate loan topped 7% in mid-August and hasn’t looked back since, according to Freddie Mac.
Doug Duncan, Fannie Mae’s vice president and chief economist, said consumers’ continued frustration with the housing market is exacerbated by increasing feelings of pessimism about the broader economy.
In the October poll, 78% of respondents said the economy was on the “wrong track,” which was up from 71% in September, he said.
“Across all income groups, inflation has been consistently leading the wrong path belief since the end of last year, suggesting that consumers are tired of rising prices for many goods and services,” Duncan said in a statement.
Despite the strong labor market and rising wages last year, he said consumers may believe their purchasing power has not kept up with prices. According to a Fannie survey, 69% of consumers say their income is “about the same” compared to the previous year.
CNN’s Anna Bahne contributed to this report.
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