Americans owe a collective $1.12 trillion on their credit cards, according to a new report on household debt from the Federal Reserve Bank of New York.
Although credit card balances fell by $14 billion in the first quarter of 2024, in line with typical spending patterns after the peak holiday season, credit card delinquency rates rose — especially among young adults, or borrowers between the ages of 18 and 29, who are burdened by high levels of student loan debt and high costs across the board, the New York Fed found.
These Generation Z borrowers also have shorter credit histories and lower credit limits, making them more likely to be maxed out on their credit cards and miss a payment, the researchers found.
“Overall balance sheets are very good but then clearly, what delinquency rates are showing is that there is increased stress among some segments of the population,” the New York Fed researchers said on a press call Tuesday.
Over the last year, roughly 8.9% of credit card balances transitioned into delinquency, the New York Fed found.
Why more Americans are falling behind
Many consumers feel strained by higher prices — most notably for food, gas and housing — and more cardholders are carrying debt from month to month or falling behind on payments, according to a separate report by Bankrate from January.
“High inflation and high interest rates are significantly contributing to Americans’ debt loads and making this debt harder to pay off,” said Ted Rossman, Bankrate’s senior industry analyst.
However, those just starting out face additional financial challenges.
Not only are their wages lower than their parents’ earnings when they were in their 20s and 30s, after adjusting for inflation, but they are also carrying larger student loan balances, recent reports show.
Further, if they bought a car or made other significant purchases in the last few years, then they are also saddled with much larger monthly payments due to higher prices and rising interest rates, the Fed researchers said: “It makes sense that particularly the younger borrowers now are struggling more.”
Credit card rates top 20%
At the same time, credit cards have become one of the most expensive ways to borrow money. Credit card rates were already high in recent years, but spiked along with the Federal Reserve’s string of 11 rate hikes since 2022, including four last year.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rose, the prime rate did, as well, and credit card rates followed suit.
The average annual percentage rate is now more than 20%, according to Bankrate — near an all-time high.
“With the Fed likely to keep rates higher for longer, credit card rates should remain high for the foreseeable future,” Rossman said. “The national average will probably end the year over 20% for only the second time ever.”
What to do if you’re in credit card debt
“Interest rates aren’t going down anytime soon, but you still have options, especially if you have good credit,” said Matt Schulz, chief credit analyst at LendingTree.
If you’re carrying a balance, try calling your card issuer to ask for a lower rate. Or you might consolidate and pay off high-interest credit cards with a lower interest home equity loan or personal loan, or switch to an interest-free balance transfer credit card, Schulz said.
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To optimize the benefits of their credit card, consumers should regularly compare credit card offers, pay as much of their balance as they can as soon as they can and avoid paying their bill late, according to Mike Townsend, a spokesperson for the American Bankers Association.
“Any credit cardholder who finds themselves in financial stress should always contact their card issuer to make them aware of their situation,” Townsend said. “They may be eligible for some relief or assistance depending on their individual circumstances.”
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