Minneapolis CNN –
The resilient consumer has kept the U.S. economic engine running, but it has come at a high price: Americans are racking up record-breaking credit card balances and more and more are falling behind on their payments.
In the third quarter, credit card balances reached a new high of $1.08 trillion, up $48 billion from the previous quarter and a record jump of $148 billion from a year ago, according to the Federal’s latest quarterly report Reserve Bank of New York on household debt and credit released on Tuesday.
The year-over-year increase is the largest since the New York Fed began collecting this data in 1999.
Household debt rose 1.3% to $17.29 trillion in the third quarter.
However, more and more households are finding it difficult to manage this debt, which is becoming increasingly expensive in an environment of painfully persistent inflation and high interest rates.
The latest data also showed that the rate of households defaulting on their credit cards or falling into serious delinquency (90 days or more delinquent) was at its highest since late 2011.
“I think economic inequality continues to rise, and that has really accelerated in the last few years,” Ted Rossman, senior industry analyst at Bankrate, told CNN.
Defaults on subprime auto loans are worse today than during the financial crisis, he said, attributing this to soaring car prices. In addition, more and more people are financing their daily needs with credit cards, he added.
“I think problems keep arising now,” he said.
Survey data showed that newly delinquent auto loan balances also continued to rise, with transitions to severe default reaching their highest level in 13 years.
“Credit card balances posted a sharp increase in the third quarter, consistent with strong consumer spending and real GDP growth,” Donghoon Lee, economic research adviser at the New York Fed, said in a statement. “The continued rise in credit card delinquency rates is widespread across all income ranges and geographies, but is particularly pronounced among millennials and those with car loans or student loans.”
Researchers at the New York Fed said the increase in the number of households falling into crime was “surprising” and “unusual” given the relative strength of the economy and labor market. They plan to examine the possible causes more when conducting future surveys, but said the increase could be due to changes in lending standards, overextended consumers or a signal of “real financial stress.”
Still, overall defaults remain below pre-pandemic levels, largely thanks to higher quality mortgage loans, New York Fed researchers said.
“Since then, however, things have really gone up,” Rossman said. “I definitely think high inflation and high credit card fees are a big contributor here.”
“This report does not distinguish between what has been paid in full and what has not, and it is approximately half, as measured by the number of cardholders who pay in full compared to those who actually owe month to month carry,” he said.
The higher balances could also be a reflection of population growth, increased e-commerce and a strong economy, he said.
“It’s not all bad,” he stated.
Mortgage originations fell to $386.37 billion, remaining well below the strong real estate activity seen in 2020 and 2021. This year is on track to see the lowest originations since 2014, according to New Yorker data Show Fed.
Even when consumers are financially strong enough to buy a home, many don’t pull the trigger, according to a new survey released Tuesday by mortgage giant Fannie Mae. About 85% of respondents said it was a “bad time” to buy a home, citing high prices and mortgage rates.
Home prices rose year-over-year for the third straight month in September, according to the National Association of Realtors. And the average interest rate on a 30-year fixed-rate loan topped 7% in mid-August and hasn’t looked back since, according to Freddie Mac.
Consumers’ ongoing frustration with the housing market is only compounded by increasing pessimism about the overall economy, said Doug Duncan, senior vice president and chief economist at Fannie Mae.
In the October survey, 78% of respondents said the economy was on the “wrong path,” up from 71% in September, he said.
“Across all income groups, inflation has consistently driven belief in the ‘false track’ since late last year, suggesting that consumers are fed up with high prices for many goods and services,” Duncan said in a statement.
Although the job market is strong and wages have risen over the past year, consumers may believe their purchasing power has not kept pace with prices, he said. According to Fannie’s survey, 69% of consumers say their income is “about the same” compared to last year.
— CNN’s Anna Bahney contributed to this report.