Record High U.S. Credit Card Debt Hits $1.14 Trillion Amid Rising Costs and Interest Rates | Warren & Migliaccio

Record Credit Card Debt Hits $1.14 Trillion

According to data released on Tuesday by the Federal Reserve Bank of New York, U.S. credit card debt has surged to an unprecedented $1.14 trillion. This marks an increase of $27 billion from the $1.13 trillion reported in the second quarter of 2024.

Economic Concerns and Rising Costs

This record debt level comes amidst fears of an economic downturn, driven by a modest rise in unemployment rates and escalating costs for essentials like food, housing, and automobiles. In 2023, a significant 60% of American adults relied on credit cards to purchase groceries, as reported by the Urban Institute in May.

Growing Delinquency Rates

The historic debt figures are also influenced by an increase in credit card delinquencies. In the second quarter, 7.18% of cardholders were reported to be delinquent, up from 5% in the previous quarter. “More people are carrying more debt for longer periods of time,” noted Ted Rossman, a senior industry analyst at Bankrate.

Debt Trends and Inflation

Rossman pointed out that while Americans reduced their credit card debt in 2020, thanks to federal stimulus payments, there has been a significant rise in balances since 2021. This surge, which saw credit card debt increase by 48%, has been driven by a boom in spending on services, coupled with high inflation and interest rates.

Increase in Other Debts

In addition to credit card debt, other forms of consumer debt have also risen. According to Fed data, mortgage debt increased by $77 billion, and auto loan debt grew by $10 billion. Overall, total consumer debt now stands at $17.8 trillion.

Impact of Rising Interest Rates

The rising interest rates on credit cards are exacerbating the debt issue. The average interest rate on new credit cards has reached 24.84%, the highest since LendingTree began tracking rates in 2019.

Potential for Rate Cuts

There may be some relief on the horizon if the Federal Reserve decides to lower its benchmark rate in September or sooner. Fed Chairman Jerome Powell indicated last week that a reduction in the policy rate could be possible if forthcoming data supports it. “The time for a rate cut is approaching,” Powell said.

Although the Federal Reserve’s benchmark rate does not directly affect credit card APRs, there is an indirect correlation. Credit card rates are closely linked to the prime rate, which tends to follow the Fed’s federal funds rate.

Matt Schulz, a credit analyst at LendingTree, suggested that a rate cut by the Fed could lead to lower APRs on credit cards, potentially providing some relief for borrowers in the coming months.