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Consumer debt tops $16 trillion as inflation fuels credit card surge

US household debt passed $16 trillion for the first time during the second quarter, the New York Federal Reserve said on Tuesday.

Even as borrowing costs rise, the NY Fed said credit card balances rose by $46 billion last quarter.

Over the past year, credit card debt has increased by $100 billion, or 13%, the largest percentage increase in more than 20 years. Credit cards typically charge high interest rates when balances are not fully paid off, making this an expensive form of debt.

“The consequences of inflation are evident in high loan volumes,” NY Fed researchers wrote in a blog post.

High inflation also makes it more expensive to carry a credit card balance because the Federal Reserve aggressively raises borrowing costs. The Fed raised its benchmark interest rate by three-quarters of a percentage point last week for the second consecutive month.
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Not only are credit card balances rising, but Americans opened 233 million new credit card accounts during the second quarter, the most since 2008, the NY Fed report found.

High inflation also forces consumers to dip into their savings. The personal savings rate fell in June to 5.1%, the lowest since August 2009, the Bureau of Labor Statistics said last week.

Despite rising debt levels, the NY Fed said the consumer balance sheet appears to be in a “strong position” overall.

Most of the 2% quarter-over-quarter increase in US household debt to $16.2 trillion was driven by a jump in mortgage lending. Student loan balances were little changed at $1.6 trillion.

By and large, Americans continued to pay down their debt on schedule last quarter, a reflection of the very strong labor market. The NY Fed said the percentage of debt that turns into delinquency remains “historically very low,” although it increased modestly.

“Although the debt balance is growing rapidly, households have generally withstood the pandemic remarkably well,” the NY Fed said in the report, noting the unprecedented assistance from the federal government during the outbreak of Covid-19.

However, there are indications that some lower-income and subprime borrowers are now struggling to keep up with their bills.

The report found that delinquency rates for credit cards and car loans are “creeping up,” especially in lower-income areas.

“With the supportive policies of the pandemic mostly in the past, there are pockets of borrowers that are beginning to show some debt distress,” the report said.

Aided by moratoriums and forbearance programs, foreclosures remain “very low,” according to the report.

However, credit reports indicate that the number of new foreclosures increased by 11,000 during the second quarter, the NY Fed said, potentially signaling “the beginning of a return to more typical levels.”

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