Americans are piling up more credit card debt as they struggle to make ends meet, and experts say it hits those who earn the least the hardest.
According to a recent report from the New York Fed, total credit card balances rose 5.8 percent year over year to $1.14 trillion. Equifax credit files through June show that credit card delinquencies continue to rise, but delinquencies on consumer loans and retail cards declined and delinquencies on auto loans remained unchanged.
People use credit cards for all kinds of purchases, and despite the stereotype that consumers go into too much debt to afford a few extra fancy clothes or vacations, they often use them for necessities.
So what does it mean for the economy that the average interest rate for people with credit card debt was 22.76% in May, that there is an expansion of financial technology products like buy now, pay later, and that many Americans are unable to repay their debt? It depends on your role in the economy, financial experts and economists say.
“If you’re one of the half who pays off their credit cards in full and takes full advantage of rewards and buyer protection, your life is great. That’s a very different story than someone who is trapped in this expensive cycle of 20 to 25 to 30% interest month after month,” said Ted Rossman, senior industry analyst at Bankrate.
Still, credit card debt growth has accelerated, which Rossman calls “potentially problematic.”
It’s impossible to look at rising credit card debt without considering high living costs, such as housing prices. The Consumer Price Index, a measure of inflation, showed that housing costs rose 0.4% in July, accounting for 90% of the increase in the overall index that month.
“Inflation definitely contributes to higher balances. Even if it’s a category like rent that most people don’t pay with a credit card, if you get squeezed on rent, you’re left with less money for groceries, gas and other things that you might now be paying for with a credit card,” he said.
The Federal Reserve’s campaign to raise interest rates to reduce inflation is also affecting credit card debt and some economists say is exacerbating economic inequality. Although the Fed suspended interest rates last year, they are still quite high and affecting credit card rates. The Fed may cut rates at its September meeting if it continues to see falling inflation data.
“People who rely on credit cards and other forms of credit to finance all sorts of things in their lives, whether it’s groceries, investing in their education, or buying things for their house or their children, and these are disproportionately poor people – they’re really suffering from the very high interest rates,” said Rakeen Mabud, chief economist and senior fellow at Groundwork Collaborative, a progressive think tank. “These interest rates are really putting a lot of strain on people’s day-to-day living and financing their lives. It seems to me that the high interest rates right now are actually causing more pain than the inflation they’re supposed to fight.”
In addition to the impact of the federal funds rate on credit cards, consumers are facing high annual percentage rates, which hit an all-time high, according to a February report from the Consumer Financial Protection Bureau. The agency said rising annual percentage rates are driving people into permanent debt and late payments.
“Credit card companies are fleeced consumers with record-high annual percentage rates on top of already high Fed rates. Credit card companies’ profiteering cost people an additional $25 billion last year and is another example of how companies use inflation as a cover to rip off their customers,” Mabud said.
The lack of competition in the lending industry is not helping those struggling with credit card debt, added Mark Zandi, chief economist at Moody’s Analytics, a provider of financial analytics products.
“There are some signs that there is less competition in this market and that credit card providers are therefore able to secure large margins,” he said.
Mitria Wilson-Spotser, vice president and director of federal policy at the Center for Responsible Lending, said she attributes the rise in credit card debt in part to the fact that some major credit card companies do not report payment data, which is therefore not included in credit reports. This hurts credit card companies’ credit scores and leads to higher credit card interest rates or them extending credit without tying it to their ability to repay.
Consumers also have access to more financial technology products, such as payroll access programs that allow workers to access their pay earlier for a fee, and products with buy-now payment models, Wilson-Spotser said. These products are not subject to the same regulations as credit cards. The Consumer Financial Protection Bureau issued a rule in May that would subject lenders with buy-now payment models to the same regulations as traditional credit cards.
“There is no obligation to ensure the consumer’s ability to repay, so these debts, which are somewhat of a phantom in the room, combine with credit card debt, which I think is one of the reasons why we are seeing an increase in delinquencies among some consumers,” she said.
Zandi said the lowest-income people who suffer most from their credit card debt account for only a fraction of the consumer spending that drives the economy.
“(High interest rates) put pressure on households with revolving debt who aren’t paying off their credit cards and are using the credit cards as a source of credit to get into debt. So that’s a real problem for those households,” he said. “…The economy can move forward and it can do well even if people in the bottom third are struggling. The economy can’t thrive, but it can do what it does.”
But that does not mean that the damaging effects of high credit card interest rates and inflation, which is cooling but still hurting households, have gone unnoticed, Zandi said, citing increasing political pressure to improve people’s economic well-being.
“But the political and social impact is enormous. You can see that in the political divide and the presidential election,” he said. “… Policy has been influenced by the fact that the share of low-income households has declined from the peaks in the late ’70s and early ’80s.”
