The New York Fed explains why consumer debt and delinquentity have grown since the first quarter of last year, and why the Federal Reserve is worried about the future
The Federal Reserve Bank of New York said that Americans added to their debt at the end of last year, while growing their credit card balances at a record rate.
Credit card balances grew at the highest amount on record during the third quarter, according to the New York Fed. Year over year, credit card balances grew 15.2%.
The Federal Reserve has raised its rates a number of times in an effort to combat high inflation. Mortgage originations went down in the fourth quarter of last year due to rising interest rates, according to a New York Fed report.
“Although historically low unemployment has kept consumers’ financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” Wilbert van der Klaauw, economic research adviser at the New York Fed, said in a statement.
Ted Rossman, senior industry analyst for Bankrate, said that it was triple trouble for credit card borrowers. Balances are up and people are carrying credit card debt at higher rates.
The share of debt that has become delinquent has increased across nearly all debt types in this high inflationary and interest rate environment, with credit cards and auto loans showing highest transparency rates.
According to New York Fed researchers, there were 18.3 million borrowers that were behind on credit card payments at the end of the year. That compares to 15.8 million at the end of 2019.
If there were to be a decline in the unemployment rate, that would make it bad for consumer debt and delinquency levels, New York Fed researchers said.
The New York Fed does not expect widespread stress for lender portfolios as balance weighted delinquencies remain at or below pre-pandemic levels. The financial distress is real, and the delinquent marks will have an impact on their access to credit for years to come.
Additionally, the ending of the current federal student loan payment forbearance could not only cause education loan delinquencies to rise but also spill over to credit card and auto loans as well, researchers noted.
A restart of student loan payments “is absolutely going to put more pressure on the consumer and force people to make touch choices,” Mike Loewengart, head of model portfolio construction at Morgan Stanley, said in an interview with CNN.
How Wewent From Near-Record Savings to Record Debt in Just Two Years: Stephanie Roth, 41, During the Pandemic
Stephanie Roth, 41, realized just how much her financial situation had deteriorated when she was signing up to bring a dish to the Valentine’s Day party at her kids’ daycare.
She works full time as a medical assistant to help people with disabilities. She had never really had debt and had always been good with money. But during the pandemic, Roth went through a divorce and her finances and lifestyle changed dramatically.
“I was literally looking at the list thinking, ‘What has inflation not messed with?’ Bananas are still 59 cents a pound and I signed up for them.
Source: https://www.npr.org/2023/03/08/1161407261/how-we-went-from-near-record-savings-to-record-debt-in-just-two-years
Mom and Dad: I Know You Shouldn’t Have to Go Out of Business, But You Can’t Make It Happen,” Amy Roth explains
Roth took full custody of her children and became the main support for her children. That was a stretch on a salary of about $40,000 a year. Considering the cost of daycare. “It’s like $1,500 a month,” she says. “That’s half my paycheck right there.”
She started to use her credit card to cover some of her expenses. Her balances began to increase. She saw her credit card company raise interest rates from 15% to 22%.
Millennials like Roth have seen their debt rise by nearly 30% since before the pandemic, to about $3.8 trillion. In 2021, the debt had fallen to a near-record low.
Americans across the income stream were saving money. “I mean a lot of cash,” says CBS news business analyst and author, The Great Money Reset.
Millions of Americans have been hit by the rising price of basics, like food, gas and clothing. She says that most of the time this is not ‘I’m going out and buying something fancy’. “Things are more expensive and just to keep up with where you were last year, you have to pay a lot more.”
She saw her debt going up, along with her minimum payments. On top of that, unexpected expenses started to spiral, like when her daughter fell and needed two stitches on her chin at the emergency room. That cost her hundreds of dollars.
“Sometimes it feels very heavy, like crushing,” says Roth. I don’t know how that is going to happen, and I have to pay this back. If I do just the minimum payments, I’ll be like 300 when it’s paid off.'”
She made too much money to qualify, in every case. “I make enough to not be poor enough to qualify for services,” he says with a laugh. I’m not sure how, because I’m so poor. You don’t know.
Roth tries every month to pay a little bit more than the minimum payment, but most of the time it just doesn’t happen. She’s concerned that her kids are missing out on things.
“I focus on making sure that they have fun, unforgettable moments,” she said. “Moments that could give them joy… because this is a special time in their lives and it’s been so hard. We’ve all been through a lot the last year or two.” Roth dreams of having enough extra money to take her kids out for ice cream on a whim or to the Build-A-Bear store.