A second indicator in less than a week shows that Americans have racked up $1 trillion in credit card debt— a first.
Outstanding credit balances hit $1.03 trillion in the second quarter, according to new data released Tuesday from the Federal Reserve Bank of New York, up 4.6% from $986 billion in the first quarter. That’s the highest level recorded for the series and follows data Friday from the Federal Reserve Bank of St. Louis that also showed credit card debt topping $1 trillion.
The reports underscore how more Americans have turned to their revolving credit over the past year, but have so far largely managed the increased debt load, especially as banks pull back on lending to riskier borrowers. The expiration of the student loan payment pause in October, though, could complicate the outlook.
"Despite the many headwinds American consumers have faced over the last year — higher interest rates, post-pandemic inflationary pressures, and the recent bank failures — there is little evidence of widespread financial distress for consumers," NY Fed researchers wrote in a blog post Tuesday.
Read more: What the Fed rate hike means for bank accounts, CDs, loans and credit cards
Delinquency rates edge higher
The number of credit card accounts grew by 5.48 million to 578.35 million in the quarter, while the aggregate credit limit increased by $9 billion to $4.6 trillion, the study found.
Overall, the share of debt newly transitioning to delinquency increased by 0.7% for credit cards, the highest increase out of all debt categories evaluated in the study. But the researchers weren’t too concerned after delinquency rates were "unusually low" during the pandemic when unprecedented government support and a limited consumer spending allowed borrowers to pay down debt.
"Credit card balances saw brisk growth in the second quarter," said Joelle Scally, regional economic principal within the Household and Public Policy Research Division at the New York Fed. "And while delinquency rates have edged up, they appear to have normalized to pre-pandemic levels."
Younger generations were more likely to experience delinquency during the second quarter, NY Fed researchers found.
The youngest Americans ages 18 to 29 had the highest credit card delinquency rates in the second quarter, according to the NY Fed. At least 8.8% were 90-plus days behind on payments, up from 8.5% the previous quarter. This was followed by 30- to 39-year-olds, who had a delinquency rate of 7%. Those 40 and up carried delinquency rates below 5%.
Subprime borrowers, or folks with higher risk of default, had a harder time qualifying for credit in the first half of the year, according to NY Fed researchers.
These borrowers saw a surge in card issuance in 2021 and 2022, but this trend slowed in the first half of 2023 and remained flat in the second quarter. By contrast, card issuance to borrowers with the highest credit scores — those over 760 — grew during the first half of 2023.
The shift in credit card issuance is in part due to US banks having tightened their lending conditions this year as concerns of a potential recession and lingering inflation piled up.
For instance, the overall rejection rate for credit card applicants increased to 21.8% in June, the NY Fed’s Credit Access Survey found. That was the highest rejection level since June 2018. The increase — while broad-based across age groups — was the highest among those with credit scores below 680.
It’s likely that subprime borrowers may have an even harder time qualifying for credit later this year.
"Regarding banks' outlook for the second half of 2023, banks reported expecting to further tighten standards on all loan categories," the Fed said in a survey summary last month. "Banks most frequently cited a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans as reasons for expecting to tighten lending standards further over the remainder of 2023."
Student loan repayment to begin
As the deadline for student loan repayment inches closer, some Americans with credit card debt may be worried about how they’ll juggle their finances.
Read more: Worried about when student loan repayments resume? These programs could help
Several months ago, the NY Fed researchers had the same concerns, but on Tuesday they noted that new policy changes will help "soften borrowers' reintroduction" to student loan repayment.
The new income-driven repayment plan rolled out this summer will help lower monthly payments. Another new policy is the 12-month on-ramp program, which will protect borrowers from "the harshest consequences of late, missed or partial payments," the White House said.
Additionally, while interest will accrue if borrowers miss payments, it will not capitalize at the end of the on-ramp period, so their outstanding balance won't grow. Notably, late payments, or those in default, will not be reported to credit bureaus or referred to collection agencies. This will be an important context for the quarterly survey moving forward, the NY Fed researchers noted.
But while the NY Fed won’t be able to track student loan delinquencies within the first first year of repayment, the researchers may be able to spot "spill over" struggles on credit card delinquencies or other debt categories.
"Rising balances may present challenges for some borrowers, and the resumption of student loan payments this fall may add additional financial strain for many student loan borrowers," NY Fed researchers wrote in the blog. "Even so, thus far, household credit shows some early signs of stabilizing at pre-pandemic health, albeit with higher nominal balances."
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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