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Consumer debt tops $16 trillion as inflation fuels credit card surge

U.S. household debt topped $16 trillion for the first time in the second quarter, the New York Federal Reserve announced on Tuesday.

Even as borrowing costs rise, the New York Fed said credit card balances rose $46 billion last quarter.

Over the past year, credit card debt has jumped $100 billion, or 13%, the biggest percentage increase in more than 20 years. Credit cards typically charge high interest rates when balances aren’t fully paid off, making them an expensive form of debt.

“The impacts of inflation are apparent in high borrowing volumes,” the New York Fed researchers wrote in a blog post.

High inflation also makes a credit card balance more expensive, as the Federal Reserve aggressively raises borrowing costs. The Fed raised its benchmark interest rate by three quarters of a percentage point last week for the second consecutive month.
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Not only are credit card balances increasing, but Americans opened 233 million new credit card accounts in the second quarter, the most since 2008, according to the New York Fed report.

High inflation also forces consumers to dip into their savings. The personal savings rate fell in June to 5.1%, the lowest since August 2009, the Bureau of Labor Statistics announced last week.

Despite rising debt levels, the New York Fed said consumer balance sheets appear to be in a “strong position” overall.

Most of the 2% quarter-over-quarter increase in US household debt to $16.2 trillion was driven by an increase in mortgage borrowing. Student loan balances were little changed at $1.6 trillion.

Overall, Americans continued to repay their debt on schedule in the last quarter, reflecting very dynamic labor market. The New York Fed said the share of current debt transitioning to delinquency remains “historically very low,” although it has increased slightly.

“Although debt balances are growing rapidly, households in general have weathered the pandemic remarkably well,” the New York Fed said in the report, noting the unprecedented federal government assistance during the outbreak. Covid-19.

There are hints, however, that some low-income and subprime borrowers are now struggling to meet their bills.

The report found that the delinquency transition rate for credit cards and auto loans is ‘skyrocketing’ especially in low-income areas.

“With pandemic support policies mostly in the past, there are pockets of borrowers who are starting to show some distress on their debt,” the report said.

Aided by moratoriums and forbearance programs, foreclosures remain “very low”, according to the report.

However, credit reports indicate that the number of new foreclosures increased by 11,000 during the second quarter, the New York Fed said, potentially signaling the “start of a return to more typical levels.”

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