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Rising credit card debt signals trouble for low- and middle-income Americans – Times of India

NEW DELHI: As the US economy shows signs of overall health, a worrying trend is emerging among low and middle income Americanswho, after enduring more than two years of inflation, find themselves depleting their savings and accumulating significant credit card debt. This financial stress is particularly pronounced among tenants within these income groups, who are increasingly struggling to stay current with their debts, a situation exacerbated by the recent resumption of student loan payments.
Because it is important
While the U.S. economy is generally in good health, groups of Americans have depleted their savings and increased their credit card balances after battling inflation for more than two years.
Experts worry that members of these groups (mostly low- and middle-income Americans, who tend to be renters) are falling behind on their debt and could face further deterioration in their financial health in the coming year, particularly those who have recently resumed paying student loans.
The panorama
Americans had more than $1.05 trillion on their credit cards in the third quarter of 2023, a record high and a figure sure to grow once the Federal Deposit Insurance Corporation releases fourth-quarter data next month .
A recent report from credit rating company Moody’s showed that credit card delinquency and charge-off rates, or the percentage of loans a bank believes will never be repaid, are now well above their 2019 levels and they are expected to continue increasing.
These worrying metrics match the average bank credit card interest rate of about 21.5%, the highest since the Federal Reserve began tracking the data in 1994.
By the numbers
Most analyzes of Americans’ financial health tend to tell the story of two consumers. On one side are approximately two-thirds of Americans who own their homes and those who have invested in the stock market and done substantially well. In general, they had the savings cushion necessary to face high inflation. Delinquency rates on single-family homes remain near historic lows and home prices have continued to rise.
But for the rest of the United States, things look difficult.
“There are these notable groups of consumers, mostly low- and middle-income renters who have not benefited from the wealth effect of higher housing and stock prices, who are feeling financial stress and that is driving these levels of income up.” delinquency. They have been hit hard by inflation,” Warren Kornfeld, a senior vice president at Moody’s, told the AP in an interview. Kornfeld, who co-wrote a report last week analyzing rising delinquency levels, expects them to continue rising this year.
What to see
Consumers’ financial health could play a big role in the 2024 election. President Joe Biden is running in part on his efforts to lower costs for American families. Republicans respond that Biden is to blame for the higher costs in the first place. One way to measure this bifurcation of the American economy is to look at the results of some of the major credit card companies. Historically, Capital One, Discover Financial and Synchrony customers have been those with lower credit scores, while American Express generally serves the wealthiest and most well-off.
At Synchrony Bank, the largest issuer of co-branded retail credit cards, the cancellation rate jumped from 3.5% to 5.6% in a year. Meanwhile, approximately 4.7% of Synchrony customers are 30 days or more late on their bills, also an increase from a year ago.
Discover customers have balances of $102 billion on their credit cards, up 13% from a year ago. Meanwhile, 30-day delinquency and amortization rates have increased. Executives say they can see the impact of inflation.
“Think of a consumer making $50,000 a year,” John Green, Discover’s chief financial officer, said at an investor conference last week. “They are spending $2,000 more on gas and food than they did a year ago. “That is a significant amount of money for that consumer.”
The bottom line
Americans must pay off their credit card debt as soon as possible, or risk falling into a vicious cycle of high interest rates, late fees, and lower credit scores. This could have serious implications for your future borrowing needs, such as mortgages, car loans or student loans.
(With contributions from agencies)

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