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As the summer season approached, there was a growing trend among Americans to resort to their credit cards as a means to meet financial needs. This resulted in the collective credit card balances surpassing $1 trillion, marking the first instance of such a milestone. These findings were disclosed by the New York Federal Reserve in their report on Tuesday.
During the period from April to June, the cumulative credit card debt saw a notable upswing, surging by $45 billion, which represents a growth of over 4%. This surge brought the overall outstanding debt to a record-high gross value of $1.03 trillion, marking the highest figure recorded in Federal Reserve data dating back to 2003.
The most prominent growth was observed in this category, contributing to the overall rise in total household debt by approximately $16 billion, reaching a new peak of $17.06 trillion. Elizabeth Renter, a data analyst at NerdWallet, a personal finance website, noted, “Household budgets have reaped the advantages of surplus savings and pandemic-related debt relief over the past three years. However, the effects of these advantages are waning. The escalation in credit card delinquencies indicates an increasing indication that consumers are grappling with the impact of elevated prices and reduced savings compared to just a few years ago.”
The Federal Reserve’s metric for credit card debt that is overdue by 30 days or more increased to 7.2% during the second quarter. This marked a rise from 6.5% in Q1 and represented the highest rate since the first quarter of 2012, though central bank officials noted that it remains close to the historical norm. In tandem, the overall delinquency rate for total debt also experienced a slight uptick, moving from 3% to 3.18%.
“In the second quarter, there was a notable surge in credit card balances,” stated Joelle Scally, who serves as the regional economic principal within the Household and Public Policy Research Division at the New York Fed. “Despite a slight increase in delinquency rates, they seem to have returned to levels seen before the pandemic.”
According to researchers at the Federal Reserve, the increase in balances can be attributed to a combination of inflationary forces and increased consumption. Addressing the matter of inflation, household income, after adjusting for inflation and taxes, is currently around 9.1% lower than its level in April 2020. This places extra strain on consumers, as highlighted by SMB Nikko Securities.
The concern arises because the sustainability of consumers’ debt accumulation during the pandemic was somewhat based on the assumption of their incomes experiencing consistent growth,” remarked Troy Ludtka, who holds the position of Senior U.S. Economist at SMBC Nikko, in a communication to clients. “However, the opposite scenario unfolded, and now the rate at which borrowers are falling behind on their debt obligations has reverted to levels seen before the Covid era. This could potentially pose as the latest challenge for beleaguered commercial banks.
Additionally, the central bank noted a decrease in the demand for issuing new cards, coinciding with banks’ reports of stricter credit standards. There were only minor shifts in debt across various other categories. Newly initiated mortgages experienced an uptick, reaching $393 billion, although the overall mortgage debt slightly decreased, resting just above $12 trillion. Auto loans saw an increase of $20 billion, reaching $1.58 trillion, while student loans decreased to $1.57 trillion, anticipating the end of the payment moratorium.
