Credit Card Debt Hits Record High as Inflation Surges

Credit Card

The cost of living in the US has soared to the highest level in over four decades, putting a strain on many households. According to the latest data from the Federal Reserve Bank of New York, Americans increasingly turned to their credit cards to make ends meet in the second quarter of 2023, sending aggregate balances over $1 trillion for the first time ever1.

Credit Card

Total credit card indebtedness increased by $45 billion in the April-through-June period, an increase of more than 4%. That took the total amount owed to $1.03 trillion, the highest gross value in Fed data going back to 20031. The increase in the category was the most notable area as total household debt edged higher by about $16 billion to $17.06 trillion, also a fresh record1.

Credit card delinquency rates rise as consumers struggle to pay off debt

As card use grew, so did the delinquency rate. The Fed’s measure of credit card debt 30 or more days late rose to 7.2% in the second quarter, up from 6.5% in Q1 and the highest rate since the first quarter of 2012 though close to the long-run normal, central bank officials said1. Total debt delinquency edged higher to 3.18% from 3%1.

“Credit card balances saw brisk growth in the second quarter,” said Joelle Scally, regional economic principal within the Household and Public Policy Research Division at the New York Fed. “And while delinquency rates have edged up, they appear to have normalized to pre-pandemic levels.”1

Fed researchers say the increase in balances reflects both inflationary pressures as well as higher levels of consumption. The Consumer Price Index, which measures the average change in prices for consumer goods and services, jumped a higher-than-expected 9.1% in June, the fastest pace in over four decades1. Wages are rising — and yet not enough to keep up with the soaring cost of living. Although average hourly earnings are up 5.1% from a year ago, prices have been rising much faster1.

Consumers face higher interest rates and tighter credit standards

In an effort to cool down the economy, in July the Federal Reserve hiked its target federal funds rate by 0.75 percentage points a second consecutive time1. Amid fears of a recession and rising interest rates, more than half, or 56%, of consumers said they are already seeing their standard of living declining, according to a recent report from digital wealth manager Personal Capital2.

Even more, roughly 69%, think their income isn’t keeping up with inflation and fewer than half said they feel “financially secure enough” for another recession, according to the survey, which polled over 2,000 adults in April2. Americans now say they need to be making about $107,800 a year to feel “financially healthy,” roughly double the national average but down 13% in the past six months, the report found2.

“If everything is costing more, that may reset your expectations on what you need to feel financially healthy,” said Paul Deer, a certified financial planner and vice president of advisory service at Personal Capital2.

The central bank also said demand for card issuance has eased, which has come in conjunction with banks saying that credit standards are tightening1. Highlighting consumers’ reliance on credit cards, consumers who were more than 90 days past due on their cards continued to add to their credit lines between Q3 2019 and Q4 2021, according to a TransUnion study of nearly six million consumers2.

During that period, consumers who were 90 days late on their credit cards decreased the amount paid beyond the minimum payment, but consumers who were current on their bank cards increased the amount paid beyond the minimum payment2. Consumers’ decline in liquidity started 12 months before severe delinquency and increased across all credit tiers2. Most consumers reached 30 days past due three months prior to serious delinquency, a sign that segmenting customers based on their liquidity changes nine months to a year beforehand is useful2.

How to manage credit card debt and avoid paying high interest?

Credit card debt can be a costly burden if not managed properly. Here are some tips on how to reduce credit card debt and avoid paying high interest:

  • Pay more than the minimum payment

    The minimum payment is usually only enough to cover the interest charges and a small portion of the principal. By paying more than the minimum, you can reduce your balance faster and save on interest costs.

  • Pay off high-interest cards first

    If you have multiple credit cards with different interest rates, focus on paying off the ones with the highest rates first. This will lower your overall interest payments and free up more money to pay off the remaining cards.

  • Transfer balances to a lower-interest card

    If you have good credit, you may be able to qualify for a balance transfer card that offers a low or zero interest rate for a limited time. This can help you pay off your debt faster and save on interest. However, be aware of the fees and terms of the balance transfer offer, and make sure you can pay off the balance before the promotional period ends.

  • Negotiate with your creditors

    If you are struggling to make your payments, you may be able to negotiate with your creditors for a lower interest rate, a payment plan, or a debt settlement. This can help you reduce your debt and avoid late fees and penalties. However, be careful of the impact on your credit score and the tax implications of any debt forgiveness.

  • Seek professional help

    If you are overwhelmed by your credit card debt, you may benefit from seeking professional help from a credit counselor or a debt management program. These services can help you create a budget, negotiate with your creditors, and consolidate your payments into one lower monthly payment. However, be sure to research the reputation and fees of any service you choose, and avoid any scams or fraudulent offers.

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