- America’s credit card debt is soaring, and the concern could peak this year.
- Banks may pay off most credit card loans by 2011, financial experts predict.
- Debt concerns will be fueled by weaker consumer finances, thanks to elevated inflation and interest rates.
Benton McClintock, 27, had been running away from his credit card bill for nearly a decade before he decided to pay it off. When McClintock was in college, he started paying for big trips to Milan, Paris and other getaways with his credit card and — until his balance hit $40,000 — thought nothing of it.
When his American Express Platinum card, which doesn’t have a traditional credit limit, started hitting a hard credit limit, he knew he was in trouble. McClintock spent the last year aggressively paying down debt, a Sisyphean task that involved him putting 90% of his income on his credit card bill and living on slim margins.
“Every day,” he said when asked if he was stressed about his finances. “You just get numb to it, I guess.”
Today, McClintock is debt free, but many others are still struggling. Americans have dug deeper into a hole of credit card debt over the past few years, and some financial experts think the debt pain will peak this year, with more banks writing off loans and consumers making even more sacrifices. deep to pay their credit card bills. personal finance professionals told BI.
They added that consumer finances will weaken, leaving many ill-equipped to deal with the fallout from pandemic spending. Sustained inflation and high borrowing rates will also contribute to the concern.
Measures of debt distress are already rising. More credit card balances are moving into delinquent status, with the delinquency rate for credit card loans rising 3.23% in the third quarter, the highest level since 2011, according to Reserve data. Federal.
The delinquency rate for credit card loans at commercial banks has climbed to the highest level since 2011. Federal Reserve
Meanwhile, the charge-off rate on credit card loans — another measure of debt distress that refers to the percentage of card balances that banks have written off their balance sheets — rose to 4.69% in the third quarter, the highest level in 13 years.
The charge-off rate for credit card loans also climbed to the highest level in more than a decade. Federal Reserve
The charge-off rate for credit card loans is expected to peak around 5% by the middle of this year, according to a projection by Fitch Ratings. That would represent the largest percentage of bad credit card loans that banks have written off since the years after the Great Financial Crisis, Fed data show.
The National Foundation for Credit Card Counseling also expects consumer credit card distress to worsen in the near term. The foundation estimated that its average customer reached “Stage 6” on the debt burden scale during the fourth quarter, a severe form of debt distress where consumers are cutting back on essentials, such as food, to service their credit card payments. .
The average NFCC customer was estimated to be in Stage 6 in the fourth quarter of 2024, a severe form of debt distress that includes cutting back on essentials. National Foundation for Credit Counseling
The trend of higher debt distress looks set to continue through 2025, the firm said in its latest Financial Stress Forecast.
Bruce McClary, senior vice president of membership and communications at NFCC, said he’s seeing more people make sacrifices to service their credit card debt, such as taking out loans against their home or 401(k).
In particular, he expects a surge in debt-stressed consumers to come for help in the next three months as Americans grapple with holiday bills.
“We expect these stress levels to reach a level significantly higher than anything we’ve seen over the last four years,” he said. “I think it would also be true to say that we expect it to go beyond what we saw before the pandemic.”
Credit Card Nation
Americans are relying on credit cards to get by more than ever. Household credit card balances rose to a record $1.17 trillion as of the third quarter of 2024, up $360 billion from the third quarter of 2020, New York Fed data show.
That increase was driven by a perfect storm of factors, McClary said, pointing to how credit card companies loosened lending standards during the pandemic, as well as the cumulative effects of higher inflation. The higher cost of living, combined with the post-pandemic shopping boom, made consumers more likely to carry a balance from month to month.
But these consumers are looking much worse than a few years ago. Households are likely to see their excess savings depleted by the pandemic by the first quarter of 2024, according to an analysis by the San Francisco Fed.
Meanwhile, credit card companies began rolling out their emergency forbearance programs in 2022, which were implemented to provide debt forgiveness during the pandemic.
Nearly half of all credit card users said they carried a month-to-month balance, according to a 2024 Bankrate survey, up from 39% of users who carried a balance in 2021.
Of those with credit card debt, 29% of users said they believed it would take them more than 5 years to pay off their loans, while 6% said they believed they would never be able to. paid their dues.
Heather Hunt, director of Fitch Ratings, says she expects debt concerns to increase as consumer finances continue to weaken in 2025, especially if the labor market worsens.
“The short story is if unemployment is going up, then your rates are going to go up. And that just signals that consumers are getting more and more anxious,” she said.
Interest rates on credit card plans charged by commercial banks rose beyond 21% in 2024, the highest in at least three decades, according to Fed data dating back to 1994.
Meanwhile, 28% of credit card debt holders said everyday expenses, like groceries, were the biggest reason they carried their balances from month to month, according to Bankrate’s survey.
McClary says he advises people struggling with credit card debt to talk to a nonprofit credit counselor as soon as possible.
“If you’re falling behind on your payments, delinquency interest rates, penalty interest rates combined with fees, can be a death blow,” McClary said. “And that’s just unsustainable for people who are already struggling financially and living paycheck to paycheck.”
Are you struggling with credit card debt, a mortgage or other forms of personal debt? Email this reporter to share your story: jsor@businessinsider.com.
