As interest rates continue to increase credit card debt balances will cause strains to people in their 20s and 30s

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When the pandemic cut Dominique Bell’s work as an Arizona social worker in half, she had no choice but to spend the federal pandemic aid she received and to run up the balances on her four credit cards to pay for groceries and cover other bills. Bell, who was completing her master’s degree at the time, found it impossible to save any of the aid and stimulus checks she received at the time. With her kids at home from school, the household’s needs grew.

“I wanted to be able to take care for my family,” said Bell, 34. Minimum payments were not “budging” and were being allocated mostly to the interest the cards were accruing rather than the principal balance each card had.

Total Debt Balance by Age

Total debt balance in trillion of dollars by age group.

Although significant government support payments, such as stimulus checks and extended and increased unemployment benefits, improved incomes in some homes, some had no choice but to use all of that assistance. And it was millennial households who piled up the most credit card debt after spending aid quickly on goods that made their homes cozier, groceries and also rent. Interest rates will keep going up because the economy is doing better than expected. Those debts will become more burdensome as interest rates go up and those heavily in debt will find it harder to borrow money or pay off their cards. Due to the higher consumer credit debt, consumer spending could be curbed, slowing economic growth.

Credit card balances saw a $61 billion increase in the fourth quarter of 2022, according to the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York released in February. The credit card balance now stands at $986 billion, after it declined in the first quarter of 2021. “Higher borrowing costs, rising job insecurity, less access to credit and the potential restart of student loan payments are all going to weigh on consumer spending and are going to particularly impact less financially secure, younger households,” said James Knightley, Chief International Economist at ING Financial Markets.

According to the report, there were 18.3 million borrowers who were delinquent on their credit cards at the end of 2022, up from 15.8 million at the end of 2019. The significant increase in credit card balances in US households has contributed to an increase in the rate of delinquent balances, with debt accumulation worsening in two age groups: adults in their twenties and adults in their thirties. During this time younger borrowers have been impacted by the fluctuating borrowing costs due to higher interest rates.

After student loan payments resume, delinquency rates may worsen. The Biden administration has extended the moratorium on student loan payments until the Department of Education can implement the debt relief program or perhaps the litigation is resolved. If the debt relief program is not implemented and the litigation is not resolved by June 30 of this year, payments will resume as early as September. These will impact “less financially secure, younger households,” added Knightley.

“The average payment before the pandemic was around $250 per month so this is going to compound the financial strains on key households if it does indeed restart and debt forgiveness is not agreed,” said Knightley.

Bell wanted to tackle her debt. After her rent was raised an additional one thousand dollars she started to inquire about debt management counseling. She first applied for rental assistance, which took 3 months to be granted, setting her in additional financial tightness. Bell’s goal was to consolidate her payments. Her credit score, which was at first good and around the 700 range, started to decline. Bell was able to get a loan for only $4,800, adding to her debt balance. “I wanted to not be in debt,” Bell added, which led her to seek counseling hoping to consolidate her debts.

“We found a significant lift in younger adults seeking services from us when looking at credit counseling volume by age group, 2021 versus 2022,” said Thomas Nitzsche, media, and brand senior director of the nonprofit Money Management International (MMI), a debt management organization. MMI’s credit counseling volume was up 14% in 2022 compared to the year before with almost 32,000 thousand clients counseled, with younger adults between the ages of 18-29 showing an average in debt-to-income.

A debt counseling agency meant a second chance for Angela Davis. The 30-year old Detroit resident was unable to work and study at the same time she quit her job and started to live off her student loans during the pandemic. Without steady additional income at the time, her credit card balances started to rise. Before looking into a debt management program, her consumer debt reached $19,000.

Davis’s total was accrued between bank cards and retail cards, like Costco and BJ’s. “I didn’t feel like I was managing,” Davis said about her monthly payments. “It didn’t seem like paying my balances was very effective, because every time I was making a payment, it just accrued more interest, and more interest, and more interest.” For instance, a vacation she meant to pay up front, turned into months of payments towards her credit card.

“I mean at some point I was afraid to even like look at my money and like it felt like once I did start back working, I have a salary and I’m making some money and I’m trying to do investments, but just like get pulled in multiple directions and just not know which way to go was kind of scary,” Davis said. The fluctuating interests started to make her payments hard to reach. “I was managing, but I didn’t feel like I was managing.”

With less than $10,000 left to pay in her consumer debt, Davis has student loans payments starting this year. Her debt, in forbearance, currently stands at more than $70 thousand dollars. When she think about her payment options

“People are returning to their old spending habits, but at the same time, they’re also being impacted by a high rate of inflation and other increases in cost of living that still have an impact on budgets. Putting the individuals who were maybe in a better position financially back to where they may have been before or even worse,” explained McClary. Some, as McClary puts it, are in a worst financially distressed situation because they have taken on more debt than they had before the student loan forbearance was implemented. Outstanding student loan debt stands at $1.6 trillion.

As households spend the highest proportion of their income on debt servicing costs for personal loans and credit cards since 2009, as a result of an increase in consumer borrowing and higher interest rates. Generation Y has limited options to get new credit cards and pay a small amount on interest rates. According to the Fed’s most recent consumer credit report, average APR is 19.07% in the last quarter of 2022 compared to 16.27% in the third quarter of the same year. That’s a 22.3% increase from the previous year and a 25.5% hike since 2018.

“Individuals will have to have to pay even more each month just to cover interest charges which could increase financial stress. This can be especially challenging for those with lower incomes or who are just starting out in their careers,” said Kelly Figueroa, bilingual program Quality assurance specialist at the debt counseling nonprofit GreenPath. “A higher APR on a higher revolving credit card balance could mean young people will pay thousands of dollars more,” Figueroa said. In general, “if you look at delinquency rates, they’ve picked up, they’re still comfortable by historical standards,” said Michael Moran, chief economist at Daiwa Capital Markets.

Dominique Bell looks back and thinks about her savings at the time. “I did not have savings,” she said. “Everything was great.” Bell has managed to pay two of her cards through debt consolidation.

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