Americans Inch Closer to Debt Level ‘Breaking Point’ as Household Borrowing Tops $17 Trillion

People shop during Black Friday in Arcadia, Calif., on Nov. 25, 2022. Frederic J. Brown/AFP via Getty Images

With Federal Reserve data showing household debt climbing above $17 trillion, the average American household is just over $14,000 away from reaching a “breaking point” at which it will be unable to continue paying off loans, according to a study by WalletHub.

The New York Federal Reserve reported on Aug. 8 that overall household debt ticked up by $16 billion in the second quarter, or 0.1 percent, to $17.06 trillion.

An analysis of the Fed data by WalletHub showed that, at the end of the second quarter, the average U.S. household owed a total of $143,762. That’s a little over $14,000 below WalletHub’s projected breaking point for household finances, which is a point at which people can’t keep up with paying their bills.

“Based on our analysis of debt during the Great Recession, the average household is about $14,339 away from truly having to worry about defaulting,” Jill Gonzalez, WalletHub analyst, told The Epoch Times in an emailed statement.

The Fed data showed that much of the increase in second-quarter household debt was driven by a jump in credit card balances, which for the first time ever surpassed $1 trillion.

“Credit card balances saw brisk growth in the second quarter,” Joelle Scally, Regional Economic Principal within the Household and Public Policy Research Division at the New York Fed, said in a statement.

“And while delinquency rates have edged up, they appear to have normalized to pre-pandemic levels,” she added.

Credit Card Deliquencies Rise

Credit card delinquencies are at an 11-year high, as measured using a four-quarter average, the New York Fed data showed.

However, the quarter-to-quarter trend appeared less alarming, with New York Fed researchers noting in a blog post accompanying the release that, despite the increase in credit card delinquency rates, there aren’t many signs that American consumers overall are experiencing financial distress.

“Despite the many headwinds American consumers have faced over the last year—higher interest rates, post-pandemic inflationary pressures, and the recent banking failures—there is little evidence of widespread financial distress for consumers,” the analysts wrote.

A separate WalletHub study recently found that the average interest rates for new credit card offers—which are often offered at a discount compared to the standard rate—is 22.39 percent, a sharp increase from 18.89 percent one year ago.

Previous years held similar averages, with 17.06 percent in 2010, with WalletHub researchers attributing the increase to recent Federal Reserve hikes. Early last year, Fed interest rates were near zero, but since March 2022, the Fed has hiked rates 11 times. In late July, the rates hit a 22-year high of 5.5 percent.

Another WalletHub study found that the Fed’s interest rate hikes thus far have increased the credit card debt burden by around $36 billion in extra interest charges over the next 12 months.

Deeper In The Hole?

In the first half of the year, American households managed to pay off over $300 billion in debt but data from last year suggest they could still end the year deeper in the hole.

“Through the first two quarters of 2023, U.S. households have paid off roughly $310 billion in debt, including $170 billion during the second quarter. That’s the good news,” Ms. Gonzalez told The Epoch Times in an emailed statement.

“The bad news is that U.S. households paid off more debt through the first half of 2022, when you adjust for inflation, and we ended 2022 with $328 billion in more debt than we started with,“ she added. ”Based on the latest statistics, there’s no reason to think 2023 won’t be the same.”

Another highlight from the New York Fed report is a decline in student loan balances by $35 billion to $1.57 trillion, with analysts attributing part of that to the Biden administration’s student loan forgiveness program.

“American consumers have so far withstood the economic difficulties of the pandemic and post-pandemic periods with resilience,” New York Fed analysts wrote in the blog post. “However, rising balances may present challenges for some borrowers, and the resumption of student loan payments this fall may add additional financial strain for many student loan borrowers.”

The federal repayment pause on student debt remains in place until Aug. 31.

The New York Fed report also showed that auto loan balances rose by $20 billion to $1.58 trillion in the second quarter. Like credit card delinquencies, auto loan delinquencies also rose in the second quarter.

At the same time, mortgage originations rose to $393 billion, up from a nine-year low of around $324 billion in the prior quarter. Mortgage delinquencies saw a slight downtick in the second quarter, the data showed.

“Debt from mortgages, home equity lines of credit and student loans declined during the second quarter of the year, continuing years-long streaks of Q2 debt reduction in these segments,” Ms. Gonzalez said.

“Unfortunately, the third and fourth quarters of the year are typically characterized by increased debt,” she added.

Around 114,000 American consumers had a bankruptcy notation added to their credit reports in second quarter, which is slightly more than in the previous quarter, according to the Fed data.