Credit Card Debt Is Squeezing Millions of US Households

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Massive credit card debts are beginning to crush the finances of millions of American households, as borrowing rates continue to rise.

The Federal Reserve’s aggressive strategy to bring down inflation by raising interest rates has raised borrowing costs to the highest level in years and worsening debt levels.

The central bank is trying to slow the economy and reduce inflation by making it more expensive to borrow money.

Last month, credit card debt soared to an all-time record high, as many Americans spent far more than they were able to afford due to high inflation, according to recent data from the Fed.

More and more Americans are taking on increasing amounts of debt in recent months, after the amount borrowed plunged at the start of the pandemic in March 2020 through mid-2021.

The rise in card debt comes as American families see their savings deplete and remaining pandemic era assistance is spent away.

APR Skyrockets Due to Fed’s Decision to Continue Hiking Rates

The annual percentage rate (APR) for credit cards hit 22.39 percent in the second quarter of 2023, up 3.5 percent from the same period in 2022, according to a new report by WalletHub.

“The current average credit card APR is the highest it’s ever been in the past two decades due to the recent Fed rate hikes,” WalletHub analyst Jill Gonzalez told The Hill.

Ms. Gonzalez predicted that the APR will continue to rise because of the central bank’s decision to raise interest rates again in July, after a break in June, to a 22-year high.

Unlike mortgages, rates on loans from credit card companies move in sync with moves by the Fed.

Total national credit card debts have now reached around $1 trillion, while the average household owes $10,000 in credit card debt.

The Consumer Financial Protection Bureau (CFPB) found that nearly 8 percent of borrowers have fallen behind on other expenditures like student loans, which are now about to restart payments.

Younger and Less Wealthy Americans Owe the Bulk of Total Debt

Gen Z and millennials have seen a significant increase in credit card debt in the second quarter of 2023, according to recent data from Credit Karma.

Average credit card debt owed by those of Gen Z now exceeds $3,300, a 4.2 percent rise, while millennials saw credit card debts jump by 2.5 percent, to an average of nearly $7,000.

“For a lot of people, they’re just really breaking even every month,” said industrialist El0n Musk said. “In fact, if you look at the rise in credit card debt, they are, in fact, not breaking even every month. Credit card debt is looking scary,” he warned.

Mr. Musk gave his remarks in response to a question about Tesla lowering the prices of its cars to make them more affordable during Tesla’s second-quarter 2023 financial earnings call.

Middle- and low-income Americans have been the hardest hit by high inflation, which has made it difficult to afford basic necessities like food, gas, and housing, said Ms. Gonzalez.

Although inflation is significantly down from the 9.1 percent high in June 2022 to 3 percent at the present, the total amount of credit card debt is displaying “the almost devastating effects of these increases,” she said.

Ms. Gonzalez predicts more hikes before the end of 2023 as the Fed attempts to slow the economy, which would increase credit card debt and the unemployment rate over the next few months.

“There’s still uncertainty about whether we’ll face a recession in the second half of the year or not, but it’s important for consumers to start saving up regardless,” Gonzalez said.

Meanwhile, Fed chairman Jerome Powell said after the central bank’s policy rate meeting last week that inflation has a “long way to go” before it reaches the central bank’s target rate of 2 percent inflation.

Mr. Powell warned that the Fed may have to raise interest rates again in September if inflation rates did not go down as planned and that central bank policymakers would need to keep rates high.

“Inflation has proved repeatedly has proved stronger than we and other forecasters have expected, and at some point that may change. We have to be ready to follow the data,” he said.

White House Attempting to Cap Credit Card Fees

The Biden administration is also trying to ease the debts of American consumers by proposing a rule to cap credit card late fees, which cost U.S. households around $12 billion a year.

It has been projected that late fees would plummet from as much as $41 per violation to $8.

The CFPB estimates that the changes would slash late fees by as much as $9 billion a year, but the financial services industry is strongly against the proposal.

The American Bankers Association, the Consumer Bankers Association, and the National Association of Federally Insured Credit Unions, for example, wrote a letter to the CFPB in May warning that such a move would make credit cards more expensive and difficult to apply for if the proposal was implemented.

They also argued that late fees were an “important incentive” to encourage on-time customer payments, minimize the risk of default, and support good credit.