Rising credit card debt signals trouble for lower and middle-income Americans

NEW DELHI: As the US economy shows signs of overall health, a concerning trend emerges among lower and middle-income Americans, who, after enduring over two years of inflation, find themselves depleting their savings and accruing significant credit card debt. This financial strain is particularly pronounced among renters within these income groups, who are increasingly struggling to keep up with their debts, a situation exacerbated by the recent resumption of student loan payments.
Why it matters
While the US economy is broadly healthy, pockets of Americans have run through their savings and run up their credit card balances after battling inflation for more than two years.
Experts worry that members of these groups — mostly lower- and middle-income Americans, who tend to be renters — are falling behind on their debts and could face further deterioration of their financial health in the year ahead, particularly those who have recently resumed paying off student loans.
The big picture
Americans held more than $1.05 trillion on their credit cards in the third quarter of 2023, a record, and a figure certain to grow once the fourth-quarter data is released by Federal Deposit Insurance Corp next month.
A recent report from the credit rating company Moody’s showed that credit card delinquency rates and charge-off rates, or the percent of loans that a bank believes will never be repaid, are now well above their 2019 levels and are expected to keep climbing.
These worrisome metrics coincide with the average interest rate on a bank credit card of roughly 21.5%, the highest it’s been since the Federal Reserve started tracking the data in 1994.
By the numbers
Most analyses of Americans’ financial health tend to tell a tale of two consumers. On one side are the roughly two-thirds of Americans who own their homes and those who’ve invested in the stock market and done substantially well. They generally had the savings cushion necessary to weather high inflation. Delinquency rates on single-family homes remain at near historic lows and home prices have continued to climb.
But for the rest of America, things are looking rough.
“You have these noticeable pockets of consumers — mostly middle- and lower-income renters who have not benefitted from the wealth effect of higher housing prices and stock prices — who are feeling financial stress and that’s driving up these delinquency levels. They’ve been hit very hard by inflation,” Warren Kornfeld, a senior vice president at Moody’s, told AP in an interview. Kornfeld, who co-wrote a report last week looking at the climbing levels of delinquencies, expects them to keep climbing this year.
What to watch
Consumers’ financial health could play a big role in the 2024 election. President Joe Biden is running in part on his efforts to bring down costs for US families. Republicans counter that Biden is to blame for higher costs in the first place. One way to gauge this bifurcation of the American economy is by looking at the results of some major credit card companies. The customers of Capital One, Discover Financial and Synchrony have historically been those with lower credit scores, while American Express typically serves the wealthiest and well-to-do.
At Synchrony Bank, the largest issuer of retail co-brand credit cards, the charge-off rate jumped from 3.5% to 5.6% in a year. Meanwhile, roughly 4.7% of Synchrony customers are 30 days or more behind on their bills, which is also up from a year ago.
Discover’s customers are carrying $102 billion in balances on their credit cards, up 13% from a year earlier. Meanwhile, the charge-off rates and 30-day delinquency rates have climbed. Executives say they can see the impact of inflation.
“Think about a consumer that makes $50,000 a year,” said John Green, Discover’s chief financial officer, at an investor conference last week. “They’re spending $2,000 more on gas and food than they did a year ago. That’s a meaningful amount of money for that consumer.”
The bottom line
Americans need to pay off their credit card debt as soon as possible, or risk falling into a vicious cycle of high interest rates, late fees, and lower credit scores. This could have serious implications for their future borrowing needs, such as mortgages, car loans, or student loans.
(With inputs from agencies)