Recent reports from the Federal Reserve highlight a concerning trend: credit card debt in the United States reached an all-time high during the third quarter of 2023. Surging nearly 5% from the previous quarter, this increase in debt has resulted in a growing number of borrowers falling behind on payments.
Economists attribute this surge in credit card debt to the dwindling savings of consumers who had built up a financial cushion during the pandemic. However, rapid price increases and soaring inflation rates have eroded these savings, particularly affecting low-income individuals who borrowed money to cope with rising expenses.
While some economists view this data as alarming, foreseeing potential weaknesses in consumer spending and a looming economic slowdown, others argue that it may not significantly impact the broader economy.
The Federal Reserve’s findings underscore the depletion of pandemic-era savings among consumers. The average net worth of U.S. households surged by nearly 40% between 2019 and 2022, but this coincided with a steep rise in inflation, leading to a drastic decline in the average savings rate.
“People have had to tap into their savings due to high inflation, and after exhausting these savings on essentials, they turn to borrowing as the next option,” stated John Sedunov, a finance professor at Villanova University.
Consumer spending, a key driver of the U.S. economy, has been bolstered by increased credit card debt, indicating a potential unsustainable reliance on borrowing.
Moreover, the spike in credit card debt highlights the acute financial stress faced by low-income individuals due to soaring prices. The rise in delinquency rates reflects the increased strain on these households, as noted by Mark Zandi, chief economist at Moody’s Analytics.
The burden of high interest rates on credit card debts—currently averaging nearly 21%—disproportionately affects those with lower incomes. This situation exacerbates budgetary problems for many individuals.
However, contrasting viewpoints exist among economists regarding the broader economic impact. While some emphasize the significance of the financial distress faced by low-income groups, others argue that their spending doesn’t heavily influence the overall economy.
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