Rising household debt has more Americans struggling: NY Fed

Household debt continues to rise, proof that more families are struggling to make ends meet, fintech industry executives believe.

The data is from the Federal Reserve Bank of New York’s Center for Microeconomic Data’s Quarterly Report on Household Debt and Credit

In the second quarter, total household debt rose by $312 billion (2%) to $16.15 trillion. That is $2 trillion higher than at the onset of the COVID-19 pandemic. 

Mortgages going to the safest bets

Debt levels are increasing across many sectors. While mortgage originations fell slightly in the quarter to stand at $758 billion, mortgage balances surged by $207 billion to stand at $11.39 trillion.

Of that $758 billion, 65% went to folks with credit scores north of 760, while only 3% flowed to subprime borrowers, down from 13% between 2003-2007. Non-housing balances grew by $103 billion, the most significant gain in six years.

While the median credit score of newly originated mortgages dropped from 788 to 773, it remains high and reflects more stringent standards, the New York Fed said. HELOC limits increased by $18 billion, the first notable increase in over a decade.

The median credit score of newly originated mortgages declined again to 773, down from a series high in 2022Q1 of 788. Yet, credit scores on newly originated mortgages remain very high and reflect continuing high lending standards.

Growing credit card balances, auto loans, contributing to household debt

Even after accounting for seasonal fluctuations, credit card balances rose $46 billion, or 13%, the highest increase in more than two decades. Aggregate limits on credit card accounts shot up by $100 billion to sit at $4.22 trillion. That’s the most significant increase in more than 10 years.

Loan sizes and their durations are both more significant as auto prices balloon. That leaves borrowers susceptible to a series of factors.

“It’s estimated that the average car payment is more than $650,” the Financial Health Network’s senior director Meghan Greene said. “The average length of a car loan has also been increasing, with many borrowers taking on loans of 73 months or more.

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“This is coupled with the Fed’s finding in Feb 2022 that the CPI for used cars and trucks has increased more than 50% since December 2020, meaning used car borrowers could owe more than their car is worth if car prices normalize. The rising balances, term lengths, and monthly payments raise questions about the sustainability of the payments for many borrowers.”

Auto loan balances rose by $33 billion, with newly originated loans up to $199 billion. That continues a trend of high volumes in dollar teams that began in late 2020. The totals reflect higher average origination amounts, not an increase in the number of loans.

Low delinquencies hide problems underneath

While delinquencies are low, that does not mean all is well, Lending Club’s SVP and financial health officer Anuj Nayar said.

“Americans are desperate for a lifeline to help them stay afloat financially. Understandably, we’ve seen a recent surge in credit card spending as a means to cope with increased sticker prices due to inflation. As economic uncertainty persists, we’ll likely see more people use credit cards to help cover basic expenses as they try to manage their cash flow.”

More people are financially struggling, Nayar added. Lending Club’s newest Paycheck to Paycheck report indicated a six-point rise in the number of Americans living from check to check (the rate is now 61%).

Meghan Greene headshot
Meghan Greene said that economic uncertainty could force families to make some hard financial choices.

“As Americans continue to spend more than they save, it is evident only a few consumers are planning financially,” Nayar added. “This means many are just beginning their financial battles, and both future expected and unexpected expenses will become harder to manage for the everyday American.”

The warning signs have been there for a while, Greene noted. Even when debt balances fell during the pandemic, 25% of Americans said they had more debt than they could manage.

“Our research suggests the ability to manage debt successfully is one pillar of financial health,” she said. “As we contend with a potential recession and an inflationary environment, it’s important to ensure that debt loads are manageable and offered at affordable rates. Particularly concerning is the Fed’s finding that delinquency rates are rising among low-income borrowers.

“Families are grappling with an uncertain economic environment. Forthcoming research by the Financial Health Network suggests that inflation may strain many families’ budgets. Some families may be turning to credit cards to make ends meet.”

  • Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain exposition in Hong Kong.