How Does $1 Trillion in Credit Card Bills Impact Household Debt?

Despite $17 trillion in U.S. consumer credit card debt, officials are not worried, claiming that the numbers are more aligned with pre-pandemic data. However, combined with the resumption of student loans and rising interest rates, the picture is not as rosy.

The country’s $1.5 trillion federal deficit was one of the reasons rating agency Fitch downgraded the debt of the United States over the summer. Likewise, total household debt for Americans reached over $17 trillion during the second quarter of 2023, with credit card balances reaching a high of $1.03 trillion, according to a recent report from the Federal Reserve Bank of New York (NY Fed).

However, while the number seems staggering, officials were not alarmed, stating, “There is little evidence of widespread financial distress for consumers.”

Is this true? After all, household debt as a percentage of income is near a 40-year low, according to the NY Fed report. But will this last? A return to normalized interest rates is having an impact on the American consumer in the form of higher mortgage rates, higher credit card rates, higher auto loan rates — translating into more money Americans need to pay on interest and less money to spend on discretionary items — and the potential to spread to other parts of the economy.

Or is there more lurking behind U.S. household debt?

Household debt increased to $17.06 trillion during the second quarter, with a large portion due to rising credit card balances, which increased by $45 billion.

Americans are in the lead when it comes to credit card debt. Among countries with the largest gross domestic product, Americans carried an average credit card balance of $5,910 in the third quarter of 2022, up from $5,221 in 2021.

The Fed’s monetary tightening campaign has pushed the average credit card interest rate up over 36% in one year — from 15.13% in May 2022 to 20.68% in May 2023. How much additional interest would a consumer with a $10,000 balance occur if they made a $200 monthly payment?

Interest payments on student loans — paused during the Covid-19 pandemic — officially resumed on September 1, with payments beginning in October for over 43 million Americans. The economic impact of these repayments is estimated at over $70 billion on otherwise disposable income.

Economists are mixed on the exact impact of student loans, but one thing is clear — the funds were being spent elsewhere — on luxury items, housing, necessities — or saved. The return to regularly scheduled student loan obligations after three years without payments could add financial stress to many American consumers or further decrease savings rates.

A recent survey of over 2,000 U.S. consumers cited the ability to save money as the top impact of resuming student loans: of the 90% surveyed who had student loans, 46% said saving money would be more challenging. This is on top of a landscape of already sinking savings rates.

The personal savings rate hit a 20-year high following the massive stimulus doled out during the pandemic, but those rates are now reaching lows not seen since the Great Financial Crisis.

As inflation eats away at household incomes, consumers may increasingly turn to credit cards to pay bills. With credit card interest rates on the rise, this is leading to an uptick in credit card delinquencies.

By far, the largest portion of household debt for U.S. consumers is housing. The average mortgage debt among Americans is $236,443, per Experian's 2022 State of Credit Report, up from $220,380 in 2021.

How have rising inflation and tightening monetary policy impacted household debt? Home foreclosures are rising across the country as the cost of living remains persistently high. According to the recent U.S. Foreclosure Market Report, U.S. property foreclosure filings, which include default notices, scheduled auctions or bank repossessions, grew by 13% in the first six months of 2023 from the same time period a year ago.

While certain inflation data have pointed to a receding of underlying price pressures, this has yet to translate into a lower cost of living for the American consumer. Although the Fed temporarily paused interest rate hikes at its June meeting, the most recent consumer price index report showed that inflation rose again in August, pushed higher by rising oil and gasoline prices. News that OPEC+ is extending output cuts through the end of 2023 will put further pressure on U.S. consumer credit and household debt. In fact, the amount of debt is increasingly chipping away at U.S. household incomes.

And the cost of living is only increasing. Americans saw their income decline by 2.3% in 2022, the third consecutive year of decreases, as inflation rose 7.8%, the largest annual increase in the cost-of-living adjustment since 1981.

If the American consumer is the main driver behind the U.S. economy what are the implications behind rising household debt? Elevated consumer credit risk, increasing charge-off rates and rising delinquencies combined with a shifting macro-economic climate is putting increasing pressure on lenders as well.

Per the Federal Reserve Bank of New York’s latest Credit Access Survey, overall credit applications fell, and rejection rates increased to their highest level since June 2018. The rejection rate was highest in the auto loan sector, increasing to a new series high. The combination of lower demand and increasing delinquencies are pushing auto lenders to scale back, including layoffs — or complete closures of their auto finance groups — Canada’s largest bank just announced the closing of its indirect retail auto finance business.

Even as the NY Fed stated there was no evidence of financial distress, they added, "However, rising balances may present challenges for some borrowers, and the resumption of student loan payments this fall may add additional financial strain for many student loan borrowers."

Does household debt impact more than just the American consumer? In a recent paper by the National Bureau of Economic Research, researchers found that a rise in household debt, often produced by more readily available credit, can predict a contracting economy.

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