WASHINGTON 

The financial stress on households rose due to inflation and interest rates in the US, bringing the amount of credit card debt US consumers held at the end of 2023 to a record high.

Household debt in the US climbed 1.2% in the fourth quarter of 2023 compared to the previous quarter, reaching $17.5 trillion, according to the Household Debt and Credit Report from the Federal Reserve Bank of New York.

Despite housing loans taking up the highest share in household debt, credit card debt stole the spotlight, as it rose approximately 5% ($50 million) compared to the previous quarter, and around 15% ($143 million) year-on-year, reaching a record high of $1.1 trillion in the fourth quarter of 2023.

The default rate on credit cards and auto financing is still rising above pre-pandemic levels, signaling increased financial stress, especially among young and low-income households, said Wilbert van der Klaauw, economic research adviser at the Fed of New York.

Credit card debt soared over 46% since early 2021

“Consumer spending has been strong, thanks in large part to a robust job market and all of the pent-up demand coming out of the pandemic,” Ted Rossman, senior industry analyst at US-based financial service firm Bankrate, told Anadolu.

Rossman said credit card debt has increased over 46% since the beginning of 2021, and that the high interest rates and inflation are “the biggest factors that have pushed credit card balances higher over the past few years.”

It matters whether credit card holders pay their debt in full each month, he said, noting that for about half of cardholders who do so, interest rates do not pose significance, while the other half “can easily become trapped in an expensive debt cycle.”

“About 6 in 10 people with credit card debt have been in credit card debt for at least a year. There's a substantial cumulative effect to paying 20%+ interest rates over the long term,” he added.

‘Credit card balances to continue to grow’

Rossman said there has been an extraordinarily high increase in credit card debt in the last two years and that this is not sustainable, adding that while the use of cash continues to decline, he expects credit card balances to increase over time due to “consumer spending, economic activity,” and population growth.

“At the end of the day, it comes down to the household level,” he added.

‘Rising inflation, other economic headwinds force Americans to rely on credit cards’

“The combination of stubborn inflation, rising inflation and other economic headwinds have shrunk many Americans’ already-tiny financial margin for error down to zero, forcing many to rely on credit cards to have them make ends meet,” Matt Schulz, chief credit analyst at US-based loaner LendingTree, told Anadolu.

“Credit card debt isn’t always a sign of struggle, it can also be a sign of confidence … but I think that the primary driver of recent credit card debt growth has been about people who are struggling rather than those who are thriving,” he added.

‘Credit card debt can have serious impact on economy’

“Credit card debt can have a serious impact on the economy,” said Schulz.

“When people are struggling with card debt, it means that they don’t have the extra money to put toward goals such as building an emergency fund, saving for retirement, college, or a mortgage down payment, starting a small business or even going on a dream vacation. All of those things have an impact on people’s personal financial outlook but also on the prospects for the economy as a whole.”

Schulz stated that there are reasons to be optimistic that 2024 will be a better year for credit card holders than the last few years, as inflation peaked, and interest rates are likely to start falling in the next six months.

“However, it is also possible that the next few months could continue to be challenging with delinquencies rising, inflation remaining stubborn, and rates yet to dip,” he added.

*Writing by Emir Yildirim