- Certain groups of Americans are facing financial hardships as inflation depletes their savings and leads to credit card debt accumulation.
- Consumer spending is contributing to the economy but increasingly relies on credit card financing, with Americans holding record-high credit card debt of over $1.05 trillion.
- Lower- and middle-income renters are particularly vulnerable to the impact of inflation, experiencing financial stress and increasing delinquency levels. The financial health of consumers could have implications for the 2024 election.
Additional Coverage:
- Some Americans have become saddled with credit card debt as rent and everyday prices remain high (newsbreak.com)
While the U.S. economy is generally doing well, certain groups of Americans are facing financial hardships as they deplete their savings and accumulate credit card debt due to the prolonged effects of inflation. Experts are concerned that lower- and middle-income individuals, particularly renters, may struggle to repay their debts and experience further financial deterioration in the coming year, especially those who have recently resumed paying off student loans.
A report by economist Shernette McLoud from TD Economics highlights that although consumer spending has helped boost the U.S. economy, it is increasingly being supported by credit card financing. In the third quarter of 2023, Americans held over $1.05 trillion in credit card debt, a record high that is expected to continue growing. The delinquency rates and charge-off rates on credit cards are also on the rise, surpassing 2019 levels, coinciding with the highest average interest rate of 21.5% on bank credit cards since 1994.
While homeowners and investors in the stock market have generally fared well and maintained healthy financial positions, other segments of the population are facing difficulties. Lower- and middle-income renters, who have not benefited from rising housing and stock prices, are particularly vulnerable to the impact of inflation. Warren Kornfeld, a senior vice president at Moody’s, explains that these individuals are experiencing financial stress and their delinquency levels are increasing. Kornfeld expects delinquencies to continue rising this year.
The financial health of consumers could have political implications in the 2024 election, with President Joe Biden highlighting his efforts to reduce costs for American families while Republicans blame Biden for the higher costs. The diverging state of the American economy can be observed through the results of major credit card companies. Capital One, Discover Financial, and Synchrony predominantly serve individuals with lower credit scores, while American Express caters to wealthier customers. Companies like Synchrony Bank have seen an increase in charge-off rates and delinquencies, indicating the impact of inflation on these customers.
Although inflation has slightly decreased from its peak in June 2022, the costs of goods and services remain elevated. Renters, in particular, have been hit hard by rising prices, with median rents for properties with up to two bedrooms experiencing a significant increase. The recent reintroduction of student loan payments also adds to the financial burden of certain individuals, especially younger and less affluent borrowers who are struggling to meet their obligations.
While credit metrics for banks like JPMorgan Chase and Bank of America have only moderately increased, they have set aside more money to cover potential loan losses, primarily related to credit card portfolios. Unfortunately, it is unlikely that Americans will find relief through lower interest rates or refinancing options in the near future. The Federal Reserve has signaled that an interest rate cut is months away, and credit card interest rates remain significantly higher than the rates offered by the Fed.
Moreover, reports indicate that banks are becoming more conservative in granting loans, reducing the chances of refinancing high-interest credit card debt into lower-interest loans for affected individuals. Although economists believe that the financial strain experienced by lower-income Americans is not currently expected to significantly impact the broader economy, rising delinquencies, particularly if compounded by student loan burdens, pose growing risks to the economy.
While rising delinquencies require monitoring, TD Economics’ McLoud suggests that they do not currently sound alarm bells.