Consumer Debt Above $16 Trillion As Inflation Fuels Credit Card Rise

U.S. household debt crossed $16 trillion for the first time in the second quarter, the New York Federal Reserve said Tuesday.

Even as borrowing costs rise, the NY Fed said credit card balances rose $46 billion in the past quarter.

In the past year, credit card debt has increased by $100 billion, or 13%, the largest percentage increase in more than 20 years. Credit cards typically charge high interest rates when credits are not fully paid off, making this an expensive form of debt.

“The effects of inflation are evident in large amounts of loans,” researchers at the NY Fed wrote in a blog post.

High inflation also makes it more expensive to maintain a credit card balance, as the Federal Reserve aggressively increases borrowing costs. Last week, the Fed raised its benchmark interest rate by three-quarters of a percentage point for the second month in a row.
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Not only are credit card balances soaring, but Americans opened 233 million new credit card accounts in the second quarter, the most since 2008, the NY Fed report found.

High inflation is also forcing consumers to dive into their savings. The personal savings rate fell to 5.1% in June, the lowest since August 2009, the Bureau of Labor Statistics said last week.

Despite rising debt, the NY Fed said consumer balance sheets generally appear to be in a “strong position.”

Most of the 2% quarter-over-quarter increase in US household debt to $16.2 trillion was driven by a surge in mortgage loans. Student loan balances had changed little at $1.6 trillion.

Overall, Americans continued to pay off debt on schedule during the quarter, reflecting a very strong labor market. The NY Fed said the proportion of current debt turning into delinquency remains “historically very low,” although it increased modestly.

“While debt balances are growing rapidly, households in general have weathered the pandemic remarkably well,” the NY Fed said in the report, pointing to the federal government’s unprecedented assistance during the onset of Covid-19.

However, there is some evidence that some lower-income, subprime borrowers are now struggling to keep up with their bills.

The report found that the transition rate for credit card and auto loan defaults is “creeping up,” especially in lower-income areas.

“With the supportive policies of the pandemic, mostly in the past, there are groups of borrowers that are starting to show some debt burden,” the report said.

Aided by moratoria and forbearance programs, bankruptcies remain “very low,” according to the report.

Credit reports, however, indicate that the number of new bankruptcies increased by 11,000 in the second quarter, the NY Fed said, possibly signaling the “beginning of a return to more typical levels.”

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