According to a report published by the New York Federal Reserve on Monday, Americans accumulated more debt at the beginning of 2023, leading to a growing number of households struggling with loan payments. In the first quarter of 2023, total household debt reached a new record of $17.05 trillion, marking a $148 billion increase (0.9%) compared to the previous quarter. This surge has pushed balances $2.9 trillion higher than their pre-pandemic levels at the end of 2019.
Debt levels experienced significant growth across various categories. Mortgage balances soared by $121 billion, reaching $12.04 trillion by the end of March, despite a sharp decline in mortgage originations to the lowest level since 2014. Auto loan balances, on the other hand, saw an increase of $10 billion in the first quarter, defying the typical trend of declining balances during this period. Student loan debt also witnessed a modest rise, reaching $1.6 trillion.
Concerns Rise as Credit Card Debt Stagnates Amid Increasing Inflation
During the beginning of the year, credit card balances remained unchanged at a record high of $986 billion, contrasting with the usual trend of reduced spending and debt repayment in the first quarter following the holiday season. Over the past decade, credit card balances typically decline by 3% during this period, indicating the persistent financial strain caused by high inflation on households.
New York Fed researchers noted that this is the first first-quarter increase observed in over 20 years, highlighting the atypical nature of current credit card balances. The rising usage and debt associated with credit cards is particularly worrisome considering the remarkably high interest rates prevailing at present. According to a Bankrate database dating back to 1985, the average credit card annual percentage rate (APR) reached a new record of 20.33% last week, surpassing the previous peak of 19% in July 1991.
Carrying debt to offset the impact of escalating prices may result in individuals paying significantly more for their purchases in the long run. For instance, the average American with a $5,000 debt could face a repayment period of approximately 277 months, accompanied by $7,723 in interest, if they only make minimum payments.
Matt Schulz, the chief credit analyst at LendingTree, expressed that it has been a challenging year for credit card holders, emphasizing that despite the Federal Reserve’s possible easing of interest rates, improvements are not expected in the near future.
Although delinquency rates remain relatively low, there has been a slight increase in the number of borrowers facing difficulties in making credit card and auto loan payments. As of March, approximately 2.6% of outstanding debt was in some form of delinquency, slightly higher than the previous quarter’s 2.5%. However, this figure still stands 2.1 percentage points lower than pre-pandemic levels.
Rising Delinquency Rates Pose Concerns Amid Robust Labor Market
The slight increase in delinquency rates, even in the presence of a robust labor market, raises concerns about the potential implications. Economists anticipate a potential rise in the unemployment rate due to the ongoing aggressive monetary policy tightening implemented by the U.S. central bank, which could further exacerbate consumer debt and delinquency levels.
These escalating balances coincide with the Federal Reserve’s proactive campaign of interest rate hikes aimed at combatting persistent inflation and moderating economic growth. The central bank’s efforts to suppress inflation and cool the economy have contributed to the prevailing circumstances.