A new report from the Federal Reserve Bank of Philadelphia provides a look at how Americans are dealing with credit card debt — and the picture is pretty bleak.
The phrase “high streak” appears over and over again throughout the brief analysis, underscoring the fact that credit card balances, delinquencies and utilization rates have reached the highest levels since the Philadelphia Fed began tracking these data in 2012.
“Credit card performance has worsened to historic levels,” the report said, noting that the percentage of people who fell at least 30 days behind on credit card payments reached an all-time high between October and December 2023.
Overall, about 3.5% of card balances were 30 days or more overdue. By the end of the year, the share of people with longer delays in credit card payments also increased. Meanwhile, nearly 11% of cardholders made only the minimum possible payment – another record high.
The researchers note that seasonal factors are at play. Toward the end of the year, which is the period this report measures, credit card balances tend to rise and borrowers miss payments more than usual due to the holiday season (but the end of 2023 was especially rough).
On the bright side, credit card balances when adjusted for inflation were slightly below pandemic levels.
Because people are now struggling with credit card debt
The Philadelphia Fed report is no exception. Several recent analyzes have reached similar conclusions, finding that Americans are falling further behind on their debts. The trend may even accelerate in 2024.
As the Philadelphia Fed report looks at the final months of 2023, data through February from credit scoring firm VantageScore shows Americans are Also struggling to make timely payments on auto loans, mortgages and personal loans.
For many people, their credit scores are plummeting because of this. A Money analysis of VantageScore data found that, over the past year, more than 1.2 million Americans became “subprime borrowers.” In other words, they fell into the lowest possible credit score category, with scores of 600 or lower.
When people have a subprime credit score, it becomes extremely difficult to participate in the U.S. financial system and modern daily life as a whole. For example, subprime borrowers are often charged exorbitant annual percentage rates. In addition to loans, internet and phone plans, security deposits and even rent payments can increase costs due to a low credit score. Employers are also increasingly considering credit history in their hiring decisions.
At the same time, VantageScore data shows that some Americans are doing better than ever and have joined the group of “superprime borrowers” with credit scores above 780. The chasm forming between them represents what an executive of VantageScore called it a “tale of two consumers.” “
The dichotomy is also evident in the Philadelphia Fed report. On the one hand, a growing share of Americans are accumulating record levels of debt on their credit cards and are only able to pay the bare minimum each month, if at all. On the other hand, approximately 1 in 3 credit card holders are able to pay off their monthly balance in full.
What’s fueling the trend? Experts at VantageScore and FICO, another credit scoring firm, say high interest rates and persistent inflation are likely the culprits.
Although inflation is indeed moderating, the prices of everyday goods and basic necessities are still much higher than before the pandemic. To curb the price surge, the Federal Reserve has raised benchmark interest rates 11 times since March 2022. Many of these prices remain stubbornly high, however, meaning interest rates are also likely to remain high for the moment.
This puts everyday consumers in something of a financial Catch-22: almost everything is more expensive. So they have to rely more on credit cards or other financing to make ends meet. But due to high interest rates, the cost of borrowing is also skyrocketing.
This begs the question: How many more all-time highs can Americans endure?
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