Americans are falling deeper into debt, but not across the board.
Credit card balances rose $24 billion in the third quarter to $1.23 trillion, a new record high and up 5.75% from a year ago, according to a new report on household debt released Wednesday by the New York Fed.
Another quarterly Credit Industry Insights report published by TransUnion also found that the average credit card balance per consumer is now $6,523, an increase of 2.2% year over year.
But despite the overall rise, the gap between consumers is widening, TransUnion found. “While some companies are experiencing increased financial resilience, others are facing increasing challenges,” the report said.
Approximately 175 million consumers have a credit card. Although some people pay off their balances every month, about 60% of credit card users carry revolving debt, according to the New York Fed. That means they’re paying an average of about 20% a year on their monthly balance, making credit cards one of the most expensive ways to borrow money.
“Differences in consumer credit risk”
Charlie Wise, TransUnion’s senior vice president of global research and consulting, said there are now more borrowers who are either super prime, with credit scores above 780, or subprime, with credit scores below 600.
This is creating an increasingly polarized consumer economy. “We’re seeing a divergence in consumer credit risk, with more individuals trending toward either end of credit risk,” Jason Lakey, TransUnion’s executive vice president and head of financial services, said in a statement.
FICO’s previous report also found that consumers are increasingly scoring within the highest and lowest score range. FICO is the company that developed one of the most widely used scores by lenders. FICO scores range from 300 to 850.
In the so-called “K”-shaped economy, some borrowers find themselves in financial distress, while others strengthen their financial position, primarily benefiting from rising stock markets and rising home values.
Other data from the Federal Reserve also shows that the wealth of the top tier is growing the fastest, as the value of their investment holdings continues to rise. The top 10% of Americans own more than 87% of corporate and mutual fund stocks.
On the other side of the chasm, separate studies show large areas of increasing financial strain.
Inflation, debt and government shutdowns: ‘a volatile combination’
In addition to increasing debt balances, 38% of consumers said it was “difficult” or “very difficult” to pay their bills on time. According to a survey by debt management company Achieve released on Friday, 67% of delinquent taxpayers cited a lack of income.
The federal government shutdown has been in effect for more than a month, affecting critical government programs including SNAP food benefits, and increasing pressure on low-income households.
“The volatile combination of consumer debt, rising inflation-driven prices, rising interest rates, and a government shutdown could leave long-term economic consequences, especially for high-risk American households struggling to make ends meet,” said Brad Stroh, co-founder and co-CEO of Achieve.
“In most cases, they have jobs, but their purchasing power is no longer increasing,” Moody’s chief economist Mark Zandi said of struggling Americans.
With wage increases barely keeping pace with stubborn inflation, “many people have borrowed money to supplement their incomes and are now paying interest on that debt,” Zandi said.
“They have a lot of debt, but they own very little,” he says.
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