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Fantastic Plastic: Americans Are Piling Up Credit Card Debt | Retail News

U.S. credit card balances grew every quarter in 2021, with the fourth-quarter gain being the biggest in numbers in 22 years, the data showed.

U.S. credit card bills jumped sharply last quarter as Americans returned to pre-pandemic spending habits.

Credit card balances grew quarterly in 2021 to end the year at $856 billion, the Federal Reserve Bank of New York said Tuesday. The fourth quarter gain was the largest in numbers in 22 years, and while the total amount is still below pre-Covid levels, the gap is rapidly closing.

New mortgage lending hit an all-time high last year and auto loans soared, reflecting sharp increases in house and car prices, the regional Fed also said in its quarterly credit and debt report. Household.

Debt graph

As prices for new and used cars soared, buyers borrowed larger amounts to finance the additional costs. This will create a longer-term financial burden for households struggling with large loan repayments, even if used vehicle prices begin to decline from their peaks.

“This is particularly a risk for those borrowers who would find themselves owing far more on their cars than they are worth if and when used car prices normalize, especially as rising vehicle prices used cars may prove unsustainable,” New York Fed economists said. in a blog post.

The US Federal Reserve is set to raise interest rates this year to help tackle decades-high inflation in the country. This will make it harder for Americans to pay off their credit card debt, according to Ted Rossman, senior industry analyst at Bankrate.com.

The average credit card charges 16.28%, according to Bankrate. “It could easily exceed 17% by the end of the year,” Rossman said. “About half of credit card holders have monthly debt. It is a very expensive debt.

Mortgage rates

Overall, US household debt increased by $333 billion to $15.6 trillion last quarter, up $1.4 trillion from the end of 2019. The vast majority of the increase comes from mortgage balances, the largest component of household debt with a 70% share. All types of debt recorded gains, with the exception of student loans.

As interest rates rise, servicing debt becomes more expensive. The average 30-year mortgage rate rose about 50 basis points last year and has since gained another 40 basis points. This means that a buyer who wants to make monthly payments of around $1,650 can now afford a home worth around $350,000 compared to $400,000 a year ago, a reduction of 12 %.

Soaring house prices during the pandemic have improved the financial situation of millions of homeowners. Still, banks remain cautious about who they lend to, the report says. Of the more than $1 trillion in new mortgage debt last quarter, about two-thirds were to borrowers with credit scores above 760 — a high threshold.

Only 2% went to subprime borrowers, a stark contrast to the 12% average seen between 2003 and 2007, before the Great Recession, according to the Fed. Last quarter there were 81 million mortgage accounts, up from more than 98 million at the start of 2008.

Another finding of the report is that young Americans are getting into housing. A record amount of mortgages came from people aged 18 to 29 last quarter.

Debt graph

Student loan debt, the second largest component of US household debt, held steady at $1.6 trillion last quarter. The 2021 increase was the lowest annual increase in nearly two decades as hundreds of thousands fewer now attend college.

About 45 million Americans in debt will resume payments in May after more than two years of a pandemic freeze. Nearly a third of the debt held by 18 to 29 year olds is made up of student loans.

Americans owe a collective debt of $1.8 trillion in student loans, according to a separate Federal Reserve measure, the result of what critics call a broken system that cripples economic mobility, cements the racial wealth gap and affects women even more.

Debt graph