After a year of soaring consumer goods prices and rising interest rates, Americans are increasingly leaning on credit cards make ends meet. And while pandemic-era stimulus payments may have contained delinquencies by bolstering household savings for a time, those accounts have since declined.
Now, signs of an impending debt crisis among American consumers are beginning to appear, and it’s a triple whammy: Credit card balances are at a all-time highannual percentage rates (APR) are up and more consumers are going into debt than in 2021.
The debt relief industry has already warned that it is witnessing a increase in demand which began last summer as struggling consumers increasingly scrambled to stay afloat. But the dam is starting to crack and the defaults have already started pouring in.
Discover Financial Services chief financial officer John Greene issued an ominous warning last week, noting a sharp rise in delinquencies. “In the card portfolio, the net charge rate of 2.37% was 87 basis points higher than the prior year and 45 basis points higher sequentially,” he said during of the company’s fourth quarter earnings call.
Meanwhile, credit card balances rose after months of high inflation outpacing wage gains, signaling that the worst is yet to come. Greene said Discover expects the default rate to increase in 2023, to between 3.5% and 3.9% on an annual basis.
The Federal Reserve Bank of New York recently reported a 15% year-over-year increase in total credit card balances for the third quarter of 2022, the largest increase in more than 20 years. .
A new report from CreditCards.com released on Monday shows that nearly 3 in 4 (72%) credit card debtors have added to their balances in the past year. Almost half (48%) took on additional debt due to rising costs, while 34% saw their balances jump due to rising interest rates. Twenty-four percent said they had a household income disruption.
According to the company’s partner site, Bankrate.com, there are also more people in debt. Some 46% of credit card holders have month-to-month debt, up from 39% a year ago.
“Especially for people on low incomes, it’s easy to see how the essentials of everyday life can overwhelm a paycheck with everything from rent to groceries to gas and more. others that are so expensive,” said Ted Rossman, senior industry analyst at Bankrate. FOX Business. “It can also be a vicious circle, as most households don’t have enough emergency savings.”
“We found earlier that emergency expenses are the most common explanation for credit card debt — for example, some sort of unexpected medical bill, car repair, or home repair,” Rossman said. . “Then come the day-to-day expenses. This seems particularly relevant in the current context of high inflation.
Debt.com President Howard Dvorkin recommends anyone with credit card debt start a plan to pay it off now, prioritizing cards with the highest interest rate first. He also urges people to track where their money is going and look for expenses that can be cut.
“Creating a budget to pay off debt and live within your means is easier said than done,” he told FOX Business. “But you have to take the first step.”