José Daniel Salinardi for Poder & Dinero and FinGurú
Consumer spending remains strong as a mountain of credit card debt continues to pile up, and Americans increasingly turn to plastic to finance their purchases. According to the New York Federal Reserve Bank, credit card debt reached $1.14 trillion in the second quarter, a 5.8% increase from the previous year, or about $6,500 per person. While the steadily rising figure took a break during the pandemic years, it has surged since 2022 as many consumers turn to it to counteract their diminishing purchasing power.
While inflation growth has slowed from record levels, the prices of nearly all items remain high compared to several years ago. This has caused a portion of the population to rely on credit cards to finance everyday goods and services purchases, increasing non-discretionary balances and making it harder to pay off debt. The resumption of student loan payments has also contributed to the increase, especially for millennials and Generation Z, while others may be struggling more to downsize their lifestyles despite price pressures.
Interest rates have not improved the situation, as the average annual percentage rate (APR) now exceeds 20%, making it a really costly debt for consumers. It is also higher than any other point since the Federal Reserve started tracking credit card APRs in 1994, contributing to overall household debt that surpassed $17.8 trillion in the second quarter. Meanwhile, credit card delinquency rates are rising: 9.1% of credit card balances went delinquent in June, up from 8.5% the previous quarter.
What is next? While markets became fearful following the latest employment figures, a recession has yet to appear, partly due to strong consumer spending. Credit card usage could continue if the Federal Reserve begins rate cuts, starting a cycle of easing likely to begin at the next Federal Open Market Committee (FOMC) meeting in September. The Biden administration is also trying to help the sector by capping late payment charges on credit cards, but a recent court ruling has set limits on this intention.
José Daniel Salinardi is a Certified Public Accountant, Faculty of Economic Sciences, University of Buenos Aires.
Journalistic producer for Poder & Dinero, and Panorama 360 (UCL Television. Latin America, United States, and Spain)
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