Inflation Is Driving Up American Household Debt

Outstanding debt in households across the country rose to ‌$16.15 trillion in the second quarter of 2022, according to a new report from the Federal Reserve Bank of New York.

The total amount of household debt across the nation increased by $312 billion, or about 2%, over the same period. The largest portion of that debt — mortgage loan balances — rose to $207 billion, making up $11.39 trillion of the nation’s consumer debt.

Non-housing debt, including auto loans and student debt, also rose by $103 billion last quarter. This marks the largest growth for this type of debt since 2016.

Credit Card Debt Increase Linked to Inflation

Rising credit card balances, which saw a 13% year-over-year increase — the largest in over 20 years — contributed to this major rise in household debt. Americans’ credit card debt grew by $46 billion in 2022’s second quarter alone, with the category totaling $890 billion in outstanding balances at the end of June.

This increase in credit card debt coincided with rapid inflation that caused a 9% spike in consumer prices during the second quarter. Joelle Scally, the New York Fed’s Administrator of the Center for Microeconomic Data, said in a statement that the “robust increases” in credit card balances and other debts were “driven in part by rising prices.”

The Federal Reserve’s interest rate hikes throughout 2022 have further impacted Americans’ credit card balances and other consumer debts. The Fed raises rates when prices are rising in an attempt to ‌rein in inflation by reducing the demand for credit — but the move also makes debt more costly for people who already have it. As a result, those with existing debt see their balances increase quickly as interest rates rise faster than they can pay off their debts.

New data compiled by VantageScore illustrates the detrimental effects of high interest rates on credit card balances. In the last quarter, account holders with credit scores below 660 saw their debt grow by nearly 25% year-over-year. Those with fair or poor credit also face more difficulty in qualifying for loans and credit cards with affordable interest rates, making the impact of rising interest rates even more significant for these borrowers.

Annuity.org Study: Many Consumers Say Their Credit Habits Haven’t Changed With Inflation

Annuity.org conducted a recent study asking participants how they felt their credit habits had changed during the past few months of steadily increasing inflation. Few participants responded that they’ve used more credit in recent months.

Nearly 30% of the survey respondents said they use less or considerably less credit than they did before, while 48% of participants reported ‌they felt they used about the same amount of credit as they did before inflation started.

This self-reported analysis of consumer credit habits contradicts the significant increase in credit card debt reported in the Fed’s data. The study’s results suggest ‌Americans may underestimate just how much more their credit cards are costing them during this period of high inflation