Americans are borrowing like never before, according to a new report from the Federal Reserve that revealed U.S. household debt swelled to a record $16.9 trillion in the final quarter of 2022, notching the largest quarterly increase in 20 years.
Total debt balances grew by $394 billion in the fourth quarter, driven mostly by a $254 billion increase in mortgage balances, according to the latest Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York, released on Feb. 16.
Overall, household debt balances are now $2.75 trillion higher than at the end of 2019, the last year before the pandemic recession hit.
Much of the rise in household debt can be attributed to a tumultuous 2022, during which the Federal Reserve boosted its benchmark interest rate to more than 4 percent by the end of December from near zero last March, the fastest pace of monetary tightening since the early 1980s.
The sharp rise in interest rates came as the Fed fought to quash an inflation rate that had surged to a 40-year high. While inflation has eased in recent months, it’s still well above the Fed’s target of 2 percent.
Credit Card Debt Soars
Credit card balances saw a $61 billion increase in the fourth quarter, which is the biggest jump in the history of the data series, which goes back to 1999. Americans also added more than ever to their credit card debt in all of 2022, with balances growing by a record $130 billion.
“For a while, Americans took advantage of stimulus payments and the fact that they were spending less due to pandemic concerns to make major progress paying down their credit card debt,” Ted Rossman, senior industry analyst at Bankrate, told The Epoch Times in an emailed statement.
“But robust consumer spending, the hottest inflation readings in 40 years, and sharply higher credit card rates have combined to push credit card balances to a new record high.”
Credit card balances now stand at $986 billion, above the pre-pandemic high of $927 billion.
The sharp rise in credit card debt gives pause in light of the fact that delinquency rates for credit card borrowers are on the rise and have surpassed pre-pandemic levels.
“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” Wilbert van der Klaauw, economic research advisor at the New York Fed, said in a statement.
After two years of historically low delinquency rates, the share of current debt becoming delinquent rose in the fourth quarter for nearly all types of debt. Delinquency rates for credit cards and auto loans rose by 0.6 and 0.4 percentage points, respectively, with younger borrowers struggling more.
“It’s triple trouble for credit card borrowers,” Rossman said. “Balances are up, rates are up, and more people are carrying credit card debt.”
A year ago, 39 percent of cardholders carried debt. Now, that figure is at 46 percent.
“If you have credit card debt, it’s critical to prioritize your interest rate,” Rossman advised.
He recommends signing up for a zero percent balance transfer card, which allows holders to put interest-rate payments on hold for up to 21 months.
In a blog post, Van der Klaauw and other New York Fed economists said that a likely factor contributing to the rise in delinquency rates at a time when economic conditions appear strong overall is the expiration of various pandemic support policies. This suggests that lower delinquency rates during the pandemic period may have been transitory and are now returning to more normal levels.
“This leaves us with a critical question though—will these delinquency rates continue to rise, or will they flatten out now?” the economists wrote.
A particular worry is that delinquency rates have climbed for younger borrowers, who are more likely to have federal student loans that are still in administrative forbearance and could find themselves struggling when they have to restart repaying student debt.
“Once payments on those loans resume later this year under current plans, millions of younger borrowers will add another monthly payment to their debt obligations, potentially driving these delinquency rates even higher,” the economists wrote.
The Fed team concluded that the likely culprits for higher delinquencies are elevated inflation and high-interest rates. They also don’t expect that lenders will be impacted severely by the rise in the number of Americans who are unable to make payments on their debt.
“While person-level delinquencies are high, we do not anticipate widespread stress for lender portfolios as balance-weighted delinquencies remain at or below pre-pandemic levels,” the team wrote.
“But, on a person-level, this financial distress is real, and the delinquent marks will impact their access to credit for years to come.”