A decade after spiraling into credit card debt during college, Ariel Barnes finds herself still ensnared, grappling with maxed-out cards and the daunting challenge of making minimum payments on $30,000 of debt. Barnes, now 28 and residing in Jackson, Mississippi, laments the exorbitant interest rates that exacerbate her struggles.
Her plight is not uncommon. Recent research from the Federal Reserve Bank of New York reveals that approximately 15.3% of Gen Z credit card borrowers, born between 1995 and 2011, have maxed out their cards, compared to just 4.8% of Baby Boomers and 9.6% of Gen Xers. These statistics underscore stark disparities masked by broader economic data.
Barnes attributes her situation to poor financial decisions in college, forcing her to delay major life events and seek therapy for the mental toll. Rising credit card delinquencies, now at 10.7%, reflect mounting financial stress exacerbated by the aftermath of the pandemic and years of high inflation, prompting concern among analysts like Ted Rossman of Bankrate.com.
Reasons to Worry
Despite record-high stock prices and low unemployment rates, many Americans are grappling with the challenges of meeting their living expenses.
Gregory Daco, chief economist at EY, highlighted the concerning trend of increasing severe delinquencies, particularly those exceeding 90 days overdue.
Research from the NY Fed established a clear correlation between maxing out credit cards and struggling to keep up with payments.
Data indicates that individuals who have utilized only 20% or less of their credit card limit are far less likely to fall behind on their bills.
However, the transition into delinquency becomes more pronounced for those who have exhausted more than 60% of their credit limit, surpassing pre-COVID levels and continuing to escalate.
One-Third of Maxed-Out Borrowers Are Behind on Payments
The trend is particularly noteworthy for individuals who have fully utilized their credit cards, defined as using between 90% and 100% of their limit.
According to the NY Fed, a third of these borrowers have fallen behind on payments in the past year, compared to less than a quarter before the pandemic.
Gregory Daco, chief economist at EY, highlighted that while many discuss a smooth economic transition, the current credit conditions indicate varied impacts across different economies and consumers due to elevated costs and interest rates.
Maxing out credit cards can negatively impact credit scores, with the balance-to-credit limit ratio being the second most influential factor in FICO Scores.
Tommy Lee, senior director at FICO, mentioned that they will closely monitor this trend to discern whether it represents a return to pre-pandemic consumer behaviors.
The NY Fed noted that a contributing factor to Gen Z’s high rate of maxed-out cards is their lower credit limits, as they often lack the credit history necessary for higher borrowing limits.
For example, the median credit limit for Gen Z borrowers is only $4,500, compared to $16,300 for Millennials and $21,800 for Gen X, according to the NY Fed.
Although the NY Fed did not provide historical data on maxed-out credit cards by generation, they explained during a call with reporters that younger borrowers typically utilize a larger portion of their credit limit.
Lee added that as consumers age and accumulate more credit experience, their credit limits tend to increase.
Residents from low-income neighborhoods are at a higher risk of reaching their credit card limits
It’s not solely younger individuals who are maxing out their credit cards. The New York Federal Reserve discovered that those residing in low-income neighborhoods are also more likely to reach their credit limits. Approximately 12% of borrowers in areas with the lowest 25% of incomes have maxed out their cards, which is more than double the 5.5% of borrowers in the highest income neighborhoods.
Carrying a credit card balance is never ideal, and the current situation exacerbates the issue. With the average credit card interest rate at 20.66%, just below the record high of 20.75% set last month, the burden on borrowers is significant. Gregory Daco, an economist at EY, emphasized that the Federal Reserve must consider the stress felt by Americans regarding credit card debt when determining when to lower interest rates.
Finding the right balance is crucial for the Fed. While cutting rates prematurely could exacerbate inflation, delaying could further strain household finances, particularly if job opportunities diminish.
Ways to get out of debt
There are potential remedies for individuals ensnared by credit card debt, according to experts.
Rossman, the Bankrate analyst, outlined several options:
Transferring high-interest credit card debt to balance transfer cards that provide 0% interest for as long as 21 months. Exploring nonprofit credit counseling services. Seeking opportunities to increase income and reduce expenses. “I understand it’s challenging,” Rossman acknowledged, “but prioritizing the repayment of credit card debt is crucial.”