Ariel Barnes is a 28-year-old woman living in Jackson, Mississippi, who has found herself stuck in a spiral of credit card debt that she has been unable to escape for over a decade. She has maxed out seven credit cards and struggles to make minimum payments on her $30,000 debt due to the high interest rates. She is not alone in her situation, as new research from the Federal Reserve Bank of New York shows that 15.3% of Gen Z credit card borrowers have also maxed out their credit cards, compared to just 4.8% of Baby Boomer borrowers and 9.6% of Gen Xers. These high levels of credit card debt are a sign of severe financial stress.
The findings of the NY Fed’s research reveal a concerning trend of Americans of all ages falling behind on their bills, particularly credit card bills. Delinquency rates have been steadily rising since the historic lows during the Covid-19 pandemic, with severe credit card delinquencies reaching 10.7% – the highest since 2012. This financial stress continues to emerge in the US economy despite the high stock markets and low unemployment rates, highlighting the discrepancy between national economic statistics and the financial struggles of many Americans.
The NY Fed found a direct link between maxing out credit cards and falling behind on payments. Those who have used more than 60% of their credit card limit are more likely to transition into delinquency, with a rising trend among those who have maxed out their cards. This trend is especially remarkable for those who have maxed out their credit cards, with a third of maxed-out borrowers going delinquent in the last year. Maxing out credit cards can also negatively impact borrowers’ credit scores, as the balance-to-credit limit ratio is a key factor in determining credit scores.
Gen Z borrowers, in particular, are more likely to max out their credit cards due to having lower credit limits as they have not had the time to build credit histories and scores. The median credit limit for Gen Z borrowers is significantly lower than that of Millennials and Gen Xers. Borrowers in low-income areas are also more likely to max out their credit cards, with 12% of borrowers in low-income neighborhoods maxing out their cards compared to 5.5% in high-income neighborhoods. The high average credit card interest rate of 20.66% further exacerbates the financial stress on borrowers, making it difficult to pay off debt.
Experts recommend possible solutions for those trapped in credit card debt, such as transferring high-interest debt to balance transfer cards, seeking out nonprofit credit counseling, and finding ways to increase income and reduce expenses. Making credit card debt payoff a priority is crucial, although it may be challenging. As the Federal Reserve considers lowering interest rates, they must take into account the significant credit card stress many Americans are experiencing and the potential consequences of their decisions on household finances.
