Americans are increasingly reliant on credit to maintain their standard of living, pushing credit card debt to a record total of $1.28 trillion. The surge, a 5.5% increase from the previous year, underscores a widening economic divide and growing financial strain on households, according to a new report from the Federal Reserve Bank of New York released on .
The total debt figure reflects balances at the close of the holiday shopping season, typically a period of increased spending and subsequent credit card accumulation. While overall consumer spending remains surprisingly resilient, researchers at the New York Fed point to a “K-shaped” economic pattern, where higher-income households continue to spend and invest while lower-income families increasingly rely on credit to cover essential expenses.
‘Evidence consistent with a K-shaped economy’
The New York Fed’s monthly Survey of Consumer Expectations, also released on , revealed a growing pessimism among consumers regarding their future financial situations. Fewer anticipate improvement, while a larger proportion expect to be worse off in the year ahead. This sentiment aligns with the observed increase in delinquencies across various debt categories.
Despite recent signs of strain in the labor market, consumer spending has largely held up, driven by robust purchasing from higher-end consumers, according to other research. However, the New York Fed researchers cautioned that this masks underlying struggles for a significant portion of the population. “You see evidence consistent with a ‘K-shaped’ economy,” they stated. “Some groups are really struggling.”
This struggle is reflected not only in rising credit card debt but also in increasing delinquencies in auto loans, home equity lines of credit, and even mortgages. Elevated delinquency rates are particularly pronounced in lower-income areas, the Fed researchers found.
Affordability puts pressure on credit card debt
With average credit card interest rates hovering around 20%, credit cards represent one of the most expensive forms of borrowing. Approximately 175 million Americans carry credit cards, and roughly 60% of users carry a balance from month to month. This reliance on revolving credit is exacerbated by rising costs for essential goods and services.
The potential for relief through proposed measures, such as President Donald Trump’s call for a on credit card interest rates, remains uncertain. While such a cap could significantly lower borrowing costs for those with existing debt, banks and industry executives have signaled their intention to fight against credit card price controls, drawing on their successful opposition to the Consumer Financial Protection Bureau’s efforts to cap late fees last year.
A separate report from debt management company Achieve revealed that more than half (55%) of consumers are now using credit cards to cover essential expenses. This trend highlights the precarious financial position of many households, forcing difficult trade-offs between debt payments and basic necessities.
“Here’s what the K-shaped economy looks like in the real world,” said Andrew Housser, Achieve’s co-founder and co-CEO, in a statement. “There’s an affluent half of the population whose financial lives aren’t disrupted by momentary inconveniences. But for everyone else, financial triage and tradeoffs are a way of life.” He added, “The longer this persists, the more the gap widens.”
The increase in overall household debt extends beyond credit cards. Total household debt increased by $191 billion, or 1%, in the fourth quarter of , reaching a new high of $18.8 trillion, according to the Federal Reserve Bank of New York’s Household Debt and Credit Developments report. This includes mortgages, student loans, and other forms of debt.
The current situation presents a complex challenge for policymakers and consumers alike. While a strong labor market has supported consumer spending, the growing reliance on credit and the widening economic divide raise concerns about the long-term sustainability of the current economic trajectory. The increasing debt burden, coupled with high interest rates, could further exacerbate financial vulnerabilities for a significant portion of the population, potentially leading to a more pronounced economic slowdown.
