Rising credit card debt could put U.S. consumers in a bind
The consumer purchases that kept the U.S. economy chugging along in 2022 were juiced by rising debt, including a record level of credit card spending, according to a new report from the Federal Reserve Bank of New York.
Total household debt rose 2.4 percent to $16.90 trillion in the fourth quarter, according to the New York Fed’s Quarterly Report on Household Debt and Credit, released last week.
About three-quarters of that total is housing debt — almost $12 trillion in mortgage balances, as well as $336 billion in balances on home equity lines of credit. Student loan debt totaled $1.6 trillion, and auto debt stood at $1.55 trillion.
Notably, credit card balances increased by $61 billion to reach $986 billion — above the prepandemic high of $927 billion and a record.
The spike in credit card debt was neither unexpected nor mysterious, considering the economic disruptions of the past several years.
“For a while, Americans took advantage of stimulus payments and the fact that they were spending less due to pandemic concerns to make major progress paying down their credit card debt,” said Ted Rossman, senior industry analyst for Bankrate, a personal finance site.
In 2020, according to the Fed, our collective credit card debt dropped by more than 10 percent, the largest decline on record. But consumer spending surged after COVID-19 lockdowns ended as Americans took advantage of the chance to travel, eat at restaurants and enjoy other in-person experiences — even as soaring inflation made those outings more expensive and strained household budgets for routine expenses.
Inflation now seems to be cooling, thanks to a series of interest rate hikes from the Federal Reserve since March. But those hikes have also had the result of pushing up annual percentage rates on credit cards, meaning that consumers turning to plastic risk being squeezed both at the time of purchase and when the bills come due.
Some have already been pushed into delinquency as a result, the Fed notes.
“Although historically low unemployment has kept consumers’ financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” said Wilbert van der Klaauw, economic research adviser at the New York Fed.
The job market remains sur
prisingly resilient, with the United States adding 517,000 jobs, pushing the unemployment rate to 3.4
percent, a 50-year low. But most economists still expect a recession or at least a slowdown in 2023, meaning consumers who’ve racked up credit card debt recently have reason to look at their
household balance sheets.
Rossman says his top tip for consumers with credit card debt is to sign up for a card that allows zero-interest balance transfers, effectively permitting
you to “to pause the interest clock” for a period of time, usually 12 to 21 months.
“If you have credit card debt, it’s critical to prioritize your interest rate,” he said. “Cash back is great, but only if you’re able to pay your bills in full and avoid interest. It doesn’t make sense to pay 20 percent in interest just to get 2 percent in cash back.”