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A growing number of Americans are falling behind on their monthly credit card payments as they continue to struggle with high inflation and interest rates, according to New York Federal Reserve data released Tuesday.
Credit card delinquencies, which have already surpassed their pre-pandemic levels, continued to rise in the three-month period from January to March.
The flow of credit card debt going into delinquency was 8.9% in the first quarter at an annualized rate, compared to a rate of 8.5% in the previous quarter and 5.87% at the end of 2023. In fact, the percentage of card balances of loans in serious delinquency rose to the highest level since 2012.
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“In the first quarter of 2024, credit card and auto loan default rates continued to increase across all age groups,” said Joelle Scally, regional economic director within the Fed’s Family and Public Policy Research Division. of New York.
“A growing number of borrowers missed credit card payments, revealing worsening financial distress among some households.”
In this photo illustration, a credit card is used to pay for gas in February. 7, 2024, in San Anselmo, California. (Justin Sullivan/Getty Images/Getty Images)
New York Fed researchers were unsure why there was such a marked increase in delinquencies given the low unemployment rate, but they offered some theories.
It may be that consumers have exhausted the excess savings they built up during the pandemic, but are still spending at high levels — even though that money is gone. The increase may also be a result of the influx in the labor market. Americans lose their jobs and then find jobs elsewhere at a lower wage.
Another possibility is that some Americans’ credit scores were artificially inflated when student loan debt stopped being reported to credit bureaus during the pandemic. As a result, this expanded the pool of those who qualified for a credit card.
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“These are all kinds of complex issues,” the researchers said. “We don’t know exactly what’s behind these increases in delinquency rates. But it’s definitely something we’re tracking.”
A new rule by the Biden administration has created an $8 cap on late credit card fees. (Matt Cardy/Getty Images/Getty Images)
The rise in credit card use and debt is particularly concerning because Interest rates are astronomically high. The credit card average annual percentage rate, or APR, hit a new record of 20.72% last week, according to a Bankrate database dating back to 1985. The previous record was 19% in July 1991.
If people take on debt to offset higher prices, they may end up paying more for items in the long run. For example, if you owe $5,000 in debt, which the average American does, April’s current levels would mean it would take about 279 months and $8,124 in interest to pay off the debt by making the minimum payments.
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The increase in balances comes in between Federal Reserve Aggressive campaign to raise interest rates as it tries to suppress stubborn inflation and cool the economy.
Although inflation has cooled Significantly in recent months, it remains up 3.7% from a year ago, according to the latest Labor Department data.
Rising inflation has created severe financial pressures for most American families, who are forced to pay more for everyday necessities like food and rent. The burden is borne disproportionately by low-income Americans, whose already stretched wages are greatly affected by price fluctuations.
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