US consumers paid almost 50 per cent more in credit card expenses last year than in 2020, the year before President Joe Biden took office, putting pressure on family budgets and firing up an election issue about what Republicans say is a cost of living crisis.
Credit card interest and fees increased by $51bn in that time to $157bn, according to data provided by US banks to the Federal Deposit Insurance Corporation.
Delinquencies on credit card loans are also running at their highest level in almost 13 years, according to data from Moody’s Analytics, even as banks have reported record profits from credit card lending.
The rise in credit card costs has come as the US Federal Reserve raised interest rates to a 23-year high but lenders have pushed consumer borrowing rates higher still. The central bank, which meets on Wednesday, is not expected to begin cutting rates until this summer.
Republicans have seized on credit card debt as an example of how Biden’s economic policies have triggered what they say is a cost of living crisis for low-income Americans, while his administration has sought to show it is clamping down on credit card companies charging excessive fees.
The debt concerns come amid polling showing Americans remain gloomy about the Biden economy despite a surging stock market, healthy gross domestic product growth and low unemployment, posing a big threat to his re-election bid this year.
Half of Americans feel worse off than four years ago under Donald Trump and rate the former president’s economic performance far higher than Biden’s.
Credit card balances are at a record high
Voters are stressed about credit card debt: 28 per cent cited it as one of their biggest sources of financial stress in a poll for the Financial Times and Michigan Ross conducted earlier this month.
They are not nearly as stressed as they are about inflation, a source of worry to 80 per cent of them. But unlike inflation, the number of voters worried about credit cards has been rising, even as the Biden administration has ushered in rules to cut the cap on late fees by about three-quarters.
Americans have gorged on billions of dollars of credit card debt over the past three years. In its report on the final quarter of 2023, the New York Fed said credit card debt hit a record $1.13tn, growing at one of the fastest rates for more than 20 years, though in real terms it remains below financial crisis levels. Incomes have also risen in that period, making the higher credit card balances more affordable.
Still, analysts say the jump in credit card debt is a sign that a growing number of consumers are having a hard time keeping up with expenses given the increase in prices of everything from food to airline tickets in the past two years.
“The level of debt has been rising a lot, and credit card loans carry the highest rates of most consumer debt” said Robert Sockin, a global economist at Citi. “It really is a sign that lower income families in the US are facing additional financial strain.”
Credit card delinquencies at their highest since 2011
Delinquencies have started to climb at the same time as a three-year moratorium on student loan repayments has ended. Credit card delinquencies have reached their highest levels since April 2011, overtaking delinquencies on car loans after two years in their shadow, according to data from Moody’s.
At 4 per cent, delinquency rates are still well short of the record 7.1 per cent in the depths of the financial crisis, thanks in part to rising incomes and thriving US job numbers.
Still, both the distribution of credit card debt and the ability to repay loans varies hugely between different groups.
One study by the Federal Reserve in 2023 found that while credit card ownership was lowest among the smallest earners, the ones that did have a card were more likely to carry a balance.
Black and Hispanic adults were more than twice as likely to carry a balance as Asian adults. Adults aged 60 and older were the largest group of credit card holders, but those aged 45-59 were most likely to roll over debt.
A New York Fed analysis in November showed that rising delinquencies are disproportionately driven by millennials — especially those with existing auto or student loans, or with higher credit card balances.
Affordability varies between states, too: Louisiana, Mississippi and Oklahoma all had credit-card-debt-to-median-income ratios of more than 10 per cent compared with the least stretched states of New Hampshire and Utah at 7 per cent, according to an FT analysis.
Interest rates hit a record at the end of 2023
Interest rates on US credit cards have been rising at the same time as balances, putting more pressure on borrowers. Annual rates hit a record 22.8 per cent at the end of 2023, according to Bloomberg data, surpassing previous highs set in the 1980s.
It is not just rising base rates that are to blame: credit card companies have increased the margin they add on to a record high, the Consumer Financial Protection Bureau found last month.
While banks are not yet dealing with higher losses, rising delinquency rates could point to higher defaults in the future. Banks are also facing rules that will make it more expensive for them to offer credit lines — even if borrowers do not actually tap them — though the rules are yet to come into effect and are expected to be watered down.
Banks have posted record profits
The cocktail of rising interest rates and balances has helped drive record profits for lenders.
Last year, they generated an estimated $92bn in earnings from credit card loans after taking into account funding costs and loan losses, according to FT calculations based on FDIC data — more than double the estimated $45bn they made a decade ago, and far higher than the period before the financial crisis.
Credit card lending is a concentrated business: about half of the loans are made by four big banks, led by JPMorgan Chase, with the next two dozen largest banks accounting for the majority of the rest.
Those tend to come with higher rates than cards issued by smaller banks, according to a study published last month by the CFPB.
Still, analysts say the credit card debt burden affects a relatively small subset of the US population and cannot explain why Americans feel down on an economy in which wages are rising and unemployment is close to record lows.
“Credit cards are not the problem,” said Mark Zandi, who is the head of Moody’s Analytics, of the economy overall. “It’s a small portion of the US that this is a big problem.”
Additional reporting by Lauren Fedor in Washington
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