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Rising Consumer Debt: A Growing Concern

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Andrew R. Michaud

• February 06, 2024

New data from the Federal Reserve Bank of New York reveals a concerning trend - consumer debt continues to climb, and the impact is becoming more evident in the form of car loan and credit card delinquencies. While the financial situation of many U.S. consumers seems stable, certain segments are experiencing difficulties, particularly lower-income households and younger consumers.

According to the New York Fed's quarterly report on household debt, total household debt, encompassing mortgages, car loans, credit cards, and student loans, has reached a staggering $17.5 trillion in the fourth quarter. This represents a quarterly growth rate of approximately 1%, consistent with the previous quarter as inflation rates steady.

Of particular concern are credit card balances and car loans, as the number of delinquencies continues to rise and surpass pre-pandemic levels. Wilbert van der Klaauw, an economic research adviser at the New York Fed, emphasizes that this upward trajectory signifies heightened financial stress among younger individuals and lower-income households.

Although delinquencies are increasing across all demographics, millennials (those born between 1980 and 1994) and individuals in the lowest quartile of income experience particularly significant credit card delinquencies. This can be attributed to their larger share of household funds being allocated to basic expenses and debts.

Furthermore, the burden of student loan payments has resurfaced for many households, which further exacerbates their financial strain. The New York Fed's data shows that student loan balances remained relatively unchanged during this quarter, with only a $2 billion increase, resulting in a total of $1.6 trillion.

In the midst of the holiday shopping season, consumers accumulated an additional $50 billion in credit card debt during the fourth quarter alone. Consequently, Americans now carry a staggering $1.13 trillion in credit card balances.

The persistent rise in consumer debt is causing growing concern among experts and researchers. As analysts continue to monitor this situation closely, it is imperative to address the mounting financial pressure faced by lower-income households and younger Americans. Effective measures must be implemented to alleviate the strain created by escalating debt levels and to promote healthier financial practices.

Rising Delinquency Rates in Credit Card Debt

During the fourth quarter, a significant portion of credit-card debt faced delinquency, with 8.5% becoming 30 or more days past due and 6.3% flowing into serious delinquency, which means it was at least 90 days past due. According to data from the New York Fed, this is the highest serious delinquency rate since the second quarter of 2011.

Increasing Delinquencies in Car Loans

In the same period, car-loan balances saw a substantial increase of $12 billion, reaching a total of $1.6 trillion during the fourth quarter. Delinquency rates for car loans also showed a worrisome trend, with 7.6% of debt becoming 30 days late and 2.6% becoming 90 days late. This represents the highest share of car-loan debt delinquencies that were at least 90 days behind since the second quarter of 2010.

The High Cost of Cars and Borrowing Challenges

The rise in car-loan delinquencies sheds light on the exorbitant costs associated with purchasing vehicles, particularly for buyers with lower credit scores. Subprime borrowers face steep borrowing costs, with interest rates on new-car loans ranging from 17% to 22% last year, as reported by Fitch Ratings.

During the fourth quarter, nearly 16% of individuals relying on financing to purchase a new car were projected to spend at least $1,000 monthly, excluding car-insurance costs. These figures illustrate the financial strain that consumers with lower credit scores face when trying to afford a vehicle.

Mixed Signals for Debt and the Economy

While the rising delinquency rates indicate vulnerabilities in the economy, there are also encouraging signs. The New York Fed's data reveals that compared to just before the start of the pandemic in early 2020, more household debt is being paid on time, suggesting certain strengths in managing debt in these challenging times.

In conclusion, the escalating delinquency rates in both credit card and car loan debt point to the increasing financial pressures faced by consumers. The high cost of cars, coupled with challenges in borrowing for those with lower credit scores, create a concerning landscape. However, it is important to note that there are positive aspects indicating some resilience in managing debt during these uncertain times.