While overall credit card debt fell in the first quarter of 2024 (as is typical after the holidays), the number of borrowers delinquent on credit card payments actually increased, according to the New York Federal Reserve’s quarterly report on household debt and credit. In fact, delinquency rates have been rising steadily since 2021 and are now above pre-pandemic levels.
To explain the increase, Fed researchers focused on the loan utilization ratio, or how much of a loan a borrower is currently using (someone with a $10,000 limit and $4,000 in fees would use 40%). According to the Fed, utilization rate is closely related to delinquency: the higher the rate, the more likely a borrower is to fall behind on a payment.
While the national utilization rate is around 30%, nearly one-fifth of borrowers, 18%, use at least 90%. And among borrowers in what the Fed calls the “maximally overextended” group, about a third of their debts went delinquent last year. Before the pandemic, this share was less than a quarter.
This shows how stressed households are, especially those with limited cash flow. Fed research shows that younger borrowers and those living in low-income areas are much more likely to be maxed out than those who tend to maintain lower utilization rates: 15.3% of Gen Z borrowers and 12.1% of Millennials exhausted their cards. compared to 9.6% of Gen Xers and 4.8% of Baby Boomers. Of course, Gen Z cardholders tend to have lower limits due to shorter credit histories.
A separate study from credit bureau TransUnion found that Generation Z is starting their adult lives with more credit card debt than previous generations. The average balance for young adults ages 22 to 24 was more than $2,800 in the last quarter of 2023, compared to the inflation-adjusted average balance in 2013 of about $2,250. according to this report.
Debt is growing at an “alarming” rate
Although the Fed’s research does not necessarily address the reasons for rising utilization rates and delinquencies, new report Digital personal finance company Achieve is also looking into why credit card debt continues to rise. The company surveyed 2,000 consumers with active accounts across categories of consumer debt that the Fed also tracks: mortgages, student loans, credit cards, auto loans and home equity lines of credit.
The main reasons for late payments were cited by respondents as inflation (21%) and a reduction in employment and income (20%). Another 11% simply forgot to pay at least one bill in the past six months. The TransUnion report also points to inflationary pressures caused by rising debt.
“It’s no surprise that in the current economic climate, in which the cost of living is significantly higher than a decade ago, young consumers are increasingly turning to credit products to meet their financial needs,” Jason Luckey, executive vice president and head of financial services at TransUnion, according to a press release accompanying the report. “As long as inflation remains high and commodity costs remain the same, balance sheets … are likely to continue to rise.”
In the Achieve report, consumers also pointed to rising credit card interest rates (a side effect of the Federal Reserve’s anti-inflation campaign) as making it harder to pay off debt.
Nearly a third of consumers, 31%, said they find it very difficult or challenging to pay current debts on time. As a result, a quarter of consumers reported a reduction in their spending over the past three months. It’s starting to show up in other data, with consumer goods giants including PepsiCo and Kraft Heinz reporting that high inflation and interest rates are hurting low-income customers.
“We know that household debt and credit are growing at an alarming rate,” Andrew Hausser, co-founder and co-CEO of Achieve, said in a press release. “For many consumers, money goes out as quickly as it comes in, if not faster.”