Financial experts say more Americans face growing debt and delinquent credit-card payments this year as the effects of COVID-19 stimulus payments wane, looming federal interest-rate hikes take hold and inflation erases income gains.
Most credit card companies saw delinquent payments tick upward in November as the effects of government relief faded.
The Federal Reserve Bank of New York found last month that the average U.S. family owed $155,622 — a total of $15 trillion— in bills ranging from credit cards to mortgages as the cost of food, gas, housing, transportation and health care kept rising. That included $804 billion in credit card bills, a sum that increased throughout last year.
“With household debt at a record $15 trillion and real wages down by 2.4% in 2021 due to record inflation, the impact of any Fed tightening on marginal credit card borrowers is likely to be severe, leading to rising delinquencies,” said Hans Dau, a supply-chain analyst and CEO of the Mitchell Madison Group business consulting firm. “The COVID-induced suspension of economic realities will come to an end one way or another.”
A recent NerdWallet poll found that 78% of 2,000 U.S. adults have received some form of government stimulus relief since March 2020, with most of it going to savings, debt and necessities. More than one-third of them said their household finances worsened over the last year.
The Department of Labor reported Thursday that wholesale prices hit 9.7% in 2021, a record annual high. That came one day after the government reported that consumer inflation jumped 7% in December from a year earlier, the highest inflation since 1982.
Overall, median income fell 3% and the cost of living rose nearly 7% during the past two years, due partly to rising housing and healthcare costs.
Early last year, pandemic financial relief softened this hit, and American consumers spent less with their credit cards as restaurants remained empty and travel was limited.
According to the St. Louis Federal Reserve Bank’s website, credit-card delinquency rates hit a long-term low in the third quarter of 2021, with mortgage debt also at a record low.
“It appears that the massive transfer of funds from government to consumers has led to strong improvements in the typical consumer balance sheet,” said Bruce Yandle, a former director of the Federal Trade Commission and dean emeritus of the Clemson College of Business and Behavioral Sciences.
But as spending increased closer to the holidays, credit card balances surged heading into the fourth quarter, which ended Dec. 31.
The Federal Reserve said mortgage balances — the largest portion of household debt — rose by $230 billion during the third quarter, while auto loans grew by $28 billion and student-loan balances by $14 billion at the start of the school year. Credit card balances grew by $17 billion, mirroring an increase of the same size in the second quarter, and non-housing balances grew by $61 billion across all debt types.
Leah Hartman, who teaches finance at the University of New Haven, said early indicators show that American debt kept rising in the fourth quarter as inflation outpaced wage growth “at least two to one.”
“With the Federal Reserve set to initiate rate increases, credit-card lending rates will be higher even for those with good credit,” Ms. Hartman said. “Variable rate mortgages will reset to higher rates of long-term debt, too.”
Americans will be wise to pay off their credit-card balances as soon as possible, she said.
“Consumers need to target those credit-card balances now,” Ms. Hartman said. “Put that New Year’s resolution of improving personal finance management in gear.”
The National Association of Realtors, the industry’s largest trade association, has predicted the Fed will raise the benchmark interest rate by 1% this year to combat inflation.
That means a larger burden on families with debt, but improving loan growth for lenders, who will reap bigger profits from credit-card balances.
Regina Wallace-Jones, chief operating officer for the debt consolidation company LendStreet, said better fiscal habits among younger Americans could help determine “whether delinquencies will return to pre-COVID levels or whether consumers have embraced a new spending normal.”
“Millennials and Generation Z have increased their year-over-year debt most substantially, utilizing debt to support them through the loss of jobs and other hardships brought on by the pandemic,” Ms. Wallace-Jones said. “As student loans come out of deferment, eviction moratoriums expire, offices reopen and the U.S. population makes its way toward a new post-pandemic normal, LendStreet expects consumers to struggle with spending that outpaces available cash, resulting in increasing credit-card debt along with other debt categories.”
The Biden administration has extended its payment pause for federal student loans through May, and the processing company Navient on Thursday agreed to cancel 66,000 college student loans worth $1.7 billion, countering allegations of predatory lending.
But Charles Mizrahi, a former Wall Street trader who founded Alpha Investor, said Americans must still rely less on credit cards and loans to thrive this year.
“Our economy has been solid for quite some time, and unfortunately too many Americans have lived beyond their means assuming it will always be that way,” Mr. Mizrahi said. “We know from experience that economies go up and down, and when we hit a bump with the pandemic, it caused folks living paycheck to paycheck to run into credit problems.”
John Berlau, director of finance policy at the libertarian Competitive Enterprise Institute, said pandemic lockdowns, government vaccine mandates and eviction moratoriums will also need to end for small businesses to maintain their spending and not take on more debt that gets passed on to the consumer.
“Americans do not need a stimulus program to solve their problems with debt,” Mr. Berlau said. “They need the government to end harmful mandates destroying their livelihoods.”