US credit card debt continues to rise as housing and other costs remain high for the lowest earners

In this photo illustration, a credit card is used to pay for gasoline on Feb. 07, 2024, in San Anselmo, California. Equifax credit files through June show that credit card delinquency is still rising. Americans’ total credit card balances are at $1.14 trillion, up 5.8% compared to a year ago, according to a recent report from the New York Fed. (Photo Illustration by Justin Sullivan/Getty Images)

Americans are racking up credit card debt as they struggle to keep up with the cost of living, and experts say those who earn the least are the hardest hit.

Total credit card balances rose 5.8% from a year ago, to $1.14 trillion, according to a recent New York Fed report. Equifax credit files through June show that credit card delinquency is still rising but that delinquency on consumer finance loans and retail cards fell and auto loan delinquency was flat.

People use credit cards for all kinds of purchases, and despite the stereotype of consumers getting themselves into too much credit card debt so that they could buy a few extra flashy clothes or vacations, many of them are for necessities.

So what does it mean for the economy that the average rate for people with a credit card balance was 22.76% in May, that there is an expansion of financial tech products like “buy now, pay later,” and that many Americans find themselves unable to pay off that debt? It depends on your role in the economy, financial experts and economists say.

“If you’re in that half who’s paying your cards in full and taking full advantage of rewards and buyer protections, life is great for you. That’s a very different story from someone who’s trapped in that expensive cycle of 20 to 25 to 30% interest month after month,” said Ted Rossman, Bankrate senior industry analyst.

Still, the rate of growth in credit card debt has accelerated, which Rossman calls “potentially troublesome.”

It’s impossible to look at rising credit card debt without acknowledging the high cost of living, such as housing prices. The Consumer Price Index, a measure of inflation, showed that in July, shelter increased 0.4% and made up 90% of that month’s rise in the all items index.

“Inflation is definitely contributing to higher balances. Even if it’s a category like rent, which most people are not putting on a credit card, if you’re getting squeezed on rent, you have less money to go around for groceries and gas and other things that maybe you are putting on a credit card now,” he said.

The Federal Reserve’s campaign to raise interest rates to bring down inflation also affects credit card debt and some economists say it is fueling economic inequality. Although the Fed paused rates last year, they are still fairly high and influence credit card rates. The Fed may cut rates in its September meeting if it continues to see cooling inflation data.

“People who rely on credit cards and other forms of borrowing to finance all sorts of things in their lives, whether that’s food or purchases for investments in their education or purchases for their home or their children, disproportionately folks who are poor – they’re really hurting because interest rates are really high,” said Rakeen Mabud, chief economist and a senior fellow at Groundwork Collaborative, a progressive think tank. “These interest rates are really taking a toll on people’s day-to-day ability to live and finance their lives. It looks to me that the high interest rates at this point are actually causing more pain than the inflation that it is trying to combat.”

In addition to the impact of the federal funds rate on credit cards, consumers are facing high annual percentage rate margins, or APR margins, which the Consumer Financial Protection Bureau said were an all-time high in a February report. The agency said rising APR margins are driving people into persistent debt and delinquency.

“Credit card companies are gouging consumers with record high APR margins, which sit on top of the Fed’s already high interest rates. Profiteering by credit card companies cost people an extra $25 billion last year and is yet another example of corporations using inflation as a cover to rip people off,” Mabud said.

A lack of competition in the credit industry doesn’t help matters for those struggling with credit card debt, added Mark Zandi, chief economist of Moody’s Analytics, which provides financial intelligence products.

“There is some evidence that there’s less competition in that market and that’s allowing credit card lenders to enjoy wide margins,” he said.

Mitria Wilson-Spotser, vice president and federal policy director at the Center for Responsible Lending, said she partly attributes the rise in credit card debt to some major credit card companies not reporting payment data, which does not make it to their credit reports, hurting their credit score and leaving them with higher credit card rates or extending credit without basing it on an ability to repay.

Consumers also have access to more financial tech products, like earned wage access programs, which let employees access their pay earlier for a fee, and buy now pay later products, said Wilson-Spotser. These products are not regulated in the same way as credit cards. The Consumer Financial Protection Bureau issued a rule in May to apply the same regulations to “buy now pay later” lenders as traditional credit cards.

“There’s no obligation to ensure an ability to repay for the consumer, so that debt, which is kind of this phantom in the room, is combining with credit card debt, which I think is probably one of the reasons why we’re seeing an increase in delinquency among some consumers,” she said.

Zandi said the people most likely to suffer financially from their credit card debt, lower-income people, only account for a sliver of the consumer spending driving the economy.

“[High interest rates] is adding to the pressure on households who have revolving debt, that aren’t paying off their cards and are using the card as a way to borrow money and have outstanding debt. So that’s a real problem for those households,” he said. “… The economy can move forward and be just fine even if the folks in the bottom third are struggling. The economy can’t flourish but it can do what it’s doing.”

That doesn’t mean the impact of the harms of high credit card rates and inflation, which is cooling but has done damage to households, will go unnoticed, however, Zandi said, alluding to building political pressure to improve people’s economic well-being.

“But the political and social implications are enormous. You can see it in our fracture of politics and what’s going on in terms of the presidential election,” he said. “… Politics has been affected by the fact that lower-income households have seen their share of the economic pie decline from where it was when it was at its peak back in the late 70s, early 80s.”