American debt stings like never before with rate hikes

After years of managing household budgets through the stress of the worst inflation in a generation, U.S. families are increasingly pressured by a different kind of financial squeeze: The cost of carrying debt.

Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade.

For the first time on record, interest payments on those and other nonmortgage debts are as big a financial burden for U.S. households as mortgage interest payments.

The figures suggest a difficult reality for the millions of consumers who are the engine of the U.S. economy: The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans.

And the Fed, which meets next week for a policy decision, doesn’t appear poised to cut rates until later in 2024.

As monthly debt payments take up more of workers’ paychecks, those consumers are more exposed to potential economic contractions.

And the cost of money affects people’s perception of their own prosperity: A February paper from IMF and Harvard University researchers posits that the recent high cost of borrowing — which isn’t captured in inflation figures — is key to understanding why consumer sentiment remains lackluster even as inflation has moderated and businesses are hiring at a healthy pace.

That theory suggests the debt burden could be a drag on President Joe Biden’s reelection bid, with the economy consistently registering as a top concern at the ballot box.

Relying on credit

The Fed’s rate hikes, by design, make it more expensive for consumers to borrow.

Since the pandemic, families have taken on debt at a comparatively fast rate.

According to calculations by Wells Fargo economists, it took only four years for households to set a new record debt level after paying down borrowings in 2021, when interest rates were still near zero. Before that, the time from one debt peak to the next was three times longer. And that increased debt load often comes with a higher price. The typical charge on a credit card has climbed to a record above 22%, according to the Fed.

It helps that many families are relatively well-positioned to service that debt: Broad wage gains mean workers are pulling in larger paychecks, and higher home prices have bolstered many households’ net worth.

And part of the reason some Americans were able to take on a substantial load of non-mortgage debt is because they’d locked in home loans at ultra-low rates, leaving room on their balance sheets for other types of borrowing. The effective rate of interest on U.S. mortgage debt was just 3.8% at the end of last year.

Yet the loans and interest payments can be a significant strain that shapes families’ spending choices.

Student debt burden

The return of student loan payments is adding to many borrowers’ financial stress.

Brittany Walling, a 29-year-old in Columbus, Ohio, has about $80,000 in federal student loans and $20,000 in private debt from her undergraduate and graduate degrees. That’s alongside $6,000 in credit card debt, which she accumulated when she was unemployed for a six-month stretch in 2022.

She’s been living paycheck to paycheck, she said, on her $50,000-a-year salary working for the public health department.

“I can’t even save I don’t have a savings account,” she said. “I just know that a lot of people are struggling, and things need to change.”