The rising share of maxed-out credit card users is causing concern as debt default rates also increase. In the first quarter of 2024, credit card debts and delinquency rates among Americans saw a notable uptick. The Federal Reserve Bank of New York reported that household credit card debt in the United States reached $1.15 trillion, a $129 billion increase from the previous year.
Of particular concern is the high median credit card utilization rate of newly delinquent individuals, which stands at 90 percent. This indicates a worsening financial situation for some households. The New York Fed’s regional economic principal, Joelle Scally, noted that the rate of credit card debts transitioning into serious delinquency is rising across all age groups.
According to a post by New York Fed economists, a key factor strongly correlated with future defaults is the high utilization rate of credit cards. While the aggregate credit card utilization rate was around 23 percent in the first quarter, it varied significantly among users. Those using less than 20 percent of their available credit had lower delinquency rates, while those using at least 90 percent had higher rates.
Users with utilization rates higher than 60 percent, especially in the 90-100 percent range, have seen a significant increase in card defaults. The share of balances associated with maxed-out borrowers that have gone delinquent has risen from less than a quarter per year before the pandemic to about a third in the last year.
Demographically, only 4.8 percent of baby boomers have maxed out their credit cards compared to 15.3 percent of Gen Z individuals. This disparity highlights the differences in financial behavior between generations.
The pandemic played a significant role in reshaping credit card usage and debt. In 2020 and 2021, credit card users made massive paydowns thanks to pandemic-related transfers and assistance. However, as the economy reopened in 2022, consumption increased, leading to a rise in maxed-out borrowers and their balances.
A survey by Bankrate revealed that 49 percent of credit card holders were carrying a balance from month to month, up from 39 percent in 2021. Unexpected or emergency expenses, such as medical bills, car repairs, and home repairs, were cited as the primary reason for carrying credit card debt. Additionally, 26 percent of participants said their card balance came from day-to-day expenses like groceries and utilities.
The Federal Reserve’s decision to raise the federal funds rate since March 2022 has also contributed to higher credit card rates. This means that credit card owners will pay more in interest for the same amount of debt compared to a few years ago. A Bankrate survey found that 47 percent of adults with credit card balances intend to pay off their debt, but 22 percent feel overwhelmed by it.
It’s important for individuals to come up with a better payoff plan, as making only minimum payments at the average rate could leave them in debt for over 18 years and owing more than $9,500 in interest. As credit card debts continue to rise and more borrowers face financial distress, it is likely that credit card delinquencies will continue to increase.
