Americans are increasingly turning to credit cards as financial pressures mount, according to new reports.
Collectively, credit card balances climbed $22 billion in the third quarter to a record $1.29 trillion, according to the Federal Reserve Bank of New York’s latest household debt report, released Tuesday. Sales are up 4.2% compared to the previous year.
Total household debt, including mortgages, auto loans and student loans, also increased by $334 billion between July and September to a record $19.1 trillion.
“Overall debt has increased,” New York Fed researchers said at a news conference Tuesday. “This reflects the financial difficulties that exist.”
“One of the most expensive means of borrowing”
The average credit card balance per consumer now stands at $6,678, up 2.4% year over year, according to a separate quarterly TransUnion Credit Industry Outlook report. The number of people with a credit card increased by 2%, from 174.8 million to 178 million.
Consumers often turn to credit cards in part because they are more accessible than other types of loans, even though the average interest rate on a new credit card offer is about 24%, according to data from LendingTree. Credit card APRs vary depending on the type of card, the issuer and the creditworthiness of the borrower.
“Credit cards remain one of the most expensive ways to borrow,” said Charlie Wise, TransUnion’s senior vice president of global research and consulting.
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Over time, a growing share of new credit cards went to borrowers with lower incomes and lower credit scores, and “these accounts now exhibit higher levels of distress,” New York Fed researchers said in a corresponding blog post.
Credit card issuers relaxed their lending standards during the Covid pandemic, and delinquency rates increased in the years that followed, New York Fed researchers said at the news conference.
“Macroeconomic headwinds – namely high inflation and rising borrowing costs – have strained consumers, with inflation outpacing wage growth for lower-income brackets,” according to the New York Fed.
Meanwhile, the cost of living continues to rise, with Americans paying more for essentials like groceries and gasoline.
Stubborn inflation has persisted for years, putting many households in a difficult situation in terms of financial accessibility. Costs for goods and services rose again more than expected in October, the Bureau of Labor Statistics also reported Tuesday.
“Higher prices and rates have pushed more people into debt,” said Ted Rossman, senior consumer credit analyst at Money Management International, a nonprofit credit counseling agency.
Balances have continued to swell in the wake of the pandemic, and even though the growth rate is now slowing, “from a household finance perspective, a lot of damage has been done,” Rossman said.
The reports follow Democrats’ strong showings in the midterms, when many voters expressed dissatisfaction with the U.S. economy, according to Kyle Moore, chief economist at the nonpartisan think tank The Century Foundation.
“The common thread connecting so many of Tuesday’s results was a recognition that America’s economy is failing American families,” Moore said, referring to Election Day.
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