Credit Card Collapse: The Debt Disaster Facing Millions of Americans

Описание: #economy #business
Recent data from the New York Fed revealed that household debt increased by a staggering $184 billion in the last quarter alone, driven primarily by rising mortgage balances as interest rates soar. If we could manage this enormous debt, it wouldn't be a major concern. However, new data shows we cannot, and a significant wave of delinquencies is on the horizon. The proportion of credit card balances in serious delinquency has climbed to its highest point since the Great Recession. With Americans struggling against high inflation and interest rates, more cardholders are falling behind on their monthly payments.

Currently, the number of people unable to pay their credit card balances in full each month has already surpassed pre-pandemic levels. The flow of credit card debt into delinquency hit 88.9% last quarter at an annualized rate, compared to 8.5% the previous quarter and 5.87% at the end of 2023. Transition rates for credit card and auto loan delinquencies continue to rise across all age groups, breaking records last seen in 2012 during the aftermath of the 2008 financial crisis. This trend indicates worsening financial distress among middle and lower-income households.

Joel Scall, a regional economic principal at the New York Fed, explained that a new economic crisis has begun, leaving millions of families financially vulnerable. Despite recommendations from economists and financial advisers to pay off balances monthly, many lack the means to do so. According to a Bankrate survey, roughly 44% of borrowers carried credit card debt from month to month in the first three months of 2024. Overall, credit card balances totaled $1.115 trillion, $129 billion more than the same period last year. Carrying a balance can lead to a dangerous debt spiral, especially today, with interest rates at record highs.

Currently, the average credit card annual percentage rate (APR) stands at a new record of 27.2%, surpassing the previous high of 19% in July 1991. This means that those carrying debt to cope with rising prices could end up paying significantly more over time. For instance, if you owe $5,000, current APR levels would result in about 279 months and $8,148.22 in payments to clear the debt. Experts warn that addressing high-interest debt should be a top financial priority, as it can quickly spiral out of control.

Mike Croxon, CEO of the National Foundation for Credit Counseling, emphasizes that time is not on the side of consumers struggling with debt. Minimum payments and missed payments will likely lead to increasing rates. Another concerning factor is that nearly one in five cardholders is maxed out, using at least 90% of their credit limit. This could exacerbate the crisis, as maxed-out borrowers are more likely to fall behind on their bills. Younger individuals and those in low-income neighborhoods are particularly vulnerable, with about one in six Generation Z borrowers and one in ten baby boomers close to exhausting their credit.

While some cardholders pay in full and enjoy benefits like rewards and buyer protections, a large number are at risk of falling into an expensive debt cycle. Of the 258 million adults in the United States, 82%, or about 212 million people, have at least one credit card account. Currently, around 19.26% of them are delinquent on their credit card debt. The number of Americans falling behind on their auto loans is also surging, with average monthly car payments now at $738. Nearly 3 million U.S. drivers are over 90 days delinquent on their auto loans, making auto loans the nation’s second-largest debt category, only behind mortgages.