U.S. Credit Card Debt Nears $1 Trillion as Inflation Ravages the Middle Class

The first-quarter dip never happened. Some observers say that’s a problem.

Credit-card balances hit $986 billion in the fourth quarter, but remain largely unchanged in the first quarter of the year, the Federal Reserve Bank of New York said in its most recent quarterly report on household debt. It looks increasingly likely that credit-card debt is on track to hit the $1 trillion mark this year, and experts say that this number could be an indicator of a looming economic downturn.

This has raised eyebrows among some observers — namely because people typically pay off their debts from the holiday season in the first quarter of the year. That did not happen. This was the first time credit-card debt had not made its customary dip between the fourth and first quarters since the end of 2000 and the beginning of 2001, New York Fed researchers said — a recession marked by the end of the “dot-com” bubble. 

“Although inflation is slowing and wages are starting to rise, inflation is still squeezing people’s budgets,” said Mary Eschelbach Hansen, a professor of economics at the American University in Washington, D.C., and author of “Bankrupt in America: A History of Debtors, Their Creditors, and the Law in the Twentieth Century.”

But she doubted that the biggest problem is people splurging on gifts over the holidays and “revenge travel” that they are now unable to pay off. “It seems likely that part of the fourth-quarter run-up in balances went towards groceries and other everyday bills rather than holiday expenditures, and folks are having a harder time paying that back,” she said.

Others shared her concerns. “I see several worrying trends here,” said Ted Rossman, senior industry analyst at Bankrate.com. “Credit-card debt is something that’s easy to get into, and hard to get out of. More people carrying balances at higher rates for longer periods of time is definitely a bad combination. We’re seeing more people financing day-to-day essentials on credit cards.”

Interest rates are also making it more difficult for people to pay off their cards. “The average credit card charges a record-high 20.33%,” Rossman added.  We also see more people carrying balances, and holding onto them for longer periods of time. All of this says a lot about the K-shaped economy: basically, the rich get richer and the poor get poorer.”

The delinquency transition rate for credit cards and automobile loans rose by 0.6 and 0.2 percentage points in the first quarter, respectively, “approaching or surpassing their pre-pandemic levels,” the New York Fed noted. Credit-card delinquencies of 90 days or more for those aged 18 to 29 reached 8.3% in the first quarter, up from 5.1% a year ago.

Carrying debt with such high levels of interest comes at a bad time for young people who will be hit by the end of the pandemic-era student-loan forbearance. Student-loan payments will resume by the end of August, or possibly earlier depending on a Supreme Court decision, meaning that 45 million people will have to start paying back their loans again. Student debt currently hovers at $1.6 trillion.

“It’s a tough spot to be in, and this is with the lowest unemployment rate in 54 years,” Rossman said. “There’s really only one way that can go from here. We’re already seeing more people falling behind with delinquencies approaching pre-pandemic levels, and particular stress among ‘canaries in the coalmine’ such as people with lower incomes and lower credit scores.”

There are signs consumers are pulling back from spending. Economic uncertainty was leading the majority of Americans (60%) to postpone plans and purchases of one kind or another, according to “The Financial States of America,” an annual Northwestern Mutual survey, released earlier this week, which was based on 2,740 online interviews.

In fact, two-thirds (67%) of U.S. adults said they expect the economy will enter into recession in 2023, the poll concluded. Of those, one-third told Northwestern Mutual that it would be short-lived, lasting a year or less, while 37% said it would last one to two years, and nearly 20% said they believed a recession would last more than two years.

While Eschelbach Hansen sees inflation, higher interest rates, and higher prices leading to cash-strapped Americans putting food on their credit cards, she said things may improve. “To interpret this data point, we’ll all have to wait and see what happens to balances, delinquencies, and consumer spending in the second quarter. I don’t like to feed negative expectations.”

Another sign of hope: the personal savings rate hit $1 trillion in March, up from $915.8 billion in February. The personal savings rate — personal savings as a percentage of disposable personal income — rose to 5.1% in March, up from 4.8% in February, according to the most recent data from the U.S. Department of Commerce.

And roughly one-third of consumers still pay off their credit cards every month, studies suggest. “It’s not all gloom and doom, even though most forecasts are for a recession, it could well be a short and shallow one,” Rossman added. “Consumer spending has been remarkably resilient and many people are doing quite well. But pockets of trouble are emerging.”

Still, it’s a bad time to be carrying debt and not paying it off, especially with a potential recession looming. “Credit-card debt is an expensive cycle that’s hard to break,” he said. “It could get harder, unfortunately, as the cumulative effects of high inflation and high-interest rates continue to take a toll, and especially if and when the job market takes a turn for the worse.”