Credit card balances—and the interest rates on that debt—have never been higher in the U.S., and it’s proving especially costly to the youngest generations, financial experts say.
Total credit card debt in the U.S. topped $1.13 trillion by the end of 2023, according to the Federal Reserve Bank of New York’s latest report on household debt, the highest on record. Though it’s not unusual for debt levels to rise with the holidays, that’s the 10th straight quarter of increases. Delinquencies, too, are on the rise.
“Even though the economy overall is still great, there are pockets out there where people are being overextended,” researchers from the New York Fed said on a press call recently.
While Americans of all ages are grappling with higher balances, Gen Z and millennials are seeing the largest average increases in total debt and the steepest decline in credit scores, according to data provided to Fortune by personal finance company Credit Karma on tens of millions of member accounts.
Credit Karma’s data shows that, on average, those with a score above 600 saw a 19-point decrease between March 2022 and February 2024. During the same time period, average credit card debt for all members increased by 37%. (Notably, those with a subprime score below 600 saw their scores increase, on average.)
Millennials with a credit score of at least 600, meanwhile, saw their scores fall by 22 points on average, while members of Gen Z in that group saw an average decrease of 20 points. Millennial credit card balances increased by 50%, while Gen Z’s ballooned by 62%.
And the Fed’s data shows that while delinquency rates are rising across age groups, the increase is most notable among borrowers 18 to 39. (And that overall delinquencies aren’t confined to credit cards, with those for auto loans and, to a lesser extent, mortgages, also increasing.)
Of course, some of the increase can be attributed to population growth and more people using credit cards instead of cash. But rising interest rates, inflation, and the return of federal student loan payments are also to blame.
Inflation has hit many households hard, with some of the robust consumer spending being propped up by credit cards. Compared to two or three years ago, “everyday things are much more expensive than they used to be,” Michael Liersch, head of advice and planning for Wells Fargo, recently told Fortune. “Whether that’s food, eggs, milk, bread—people feel like they’re cutting back because it’s very salient that things are much more expensive…we’re not getting as much utility out of our money as we used to.”
“These consumers are increasingly relying on credit to get by,” says Mark Elliot, chief customer officer at LendingClub, noting the company’s own data shows millennials are the generation most likely to live paycheck-to-paycheck, followed by Gen Z. “Higher debt levels hamper one’s ability to achieve financial goals, but also pose long-term risks to economic well-being and mental health.”
The return of student loan payments has also been a burden, with the Fed noting rising credit card delinquency rates are being driven disproportionately by those with education debt. And interest rates on credit cards have never been higher, making debt increasingly expensive. Average credit card interest rates increased from 12.9% in 2013 to 22.8% in 2023, according to the Consumer Financial Protection Bureau, costing consumers tens of billions of dollars, at least.
“By some measures, credit cards have never been this expensive,” the CFPB notes. Credit card interest rates had been steadily rising but were supercharged in 2022 and 2023, according to the CFPB’s report, when the Federal Reserve raised its benchmark rate for the first time in years to help rein in inflation.
All of that puts young people, in particular, at a disadvantage, says Nicole Gopoian Wirick, a Michigan-based certified financial planner and founder of Prosperity Wealth Strategies. While older generations may carry more total debt, members of Gen Z are beginning their careers and lives as everything from housing to food costs prohibitively more. And if they do carry a credit card balance, the interest on it is likely higher than when Gen Xers or baby boomers were younger, meaning that debt would compound even higher.
‘The issue compounds very, very quickly’
That said, having the lowest average balances of any generation—around $3,300, according to Credit Karma—means it’s easier for young people to make lasting financial change now, Wirick says.
“If left unaddressed, the issue compounds very, very quickly,” says Wirick. “They’re still young, they have time to change their habits, or else that lifestyle creep is going to become their new normal.”
While millennials and Gen Z saw more dramatic increases in debt and decreases in scores, Gen X isn’t faring much better, as the chart above shows. Gen Xers carry the most credit card debt on average, and saw their balances increase by 39% over the past year.
The across-the-board increases are an abrupt departure from the pandemic period, when household debt delinquencies reached historic lows and Americans were piling away savings, largely thanks to government forbearance programs and support like stimulus payments and enhanced unemployment insurance. Credit card balances actually dropped in the early months of the COVID-19 pandemic, and the share of accounts carrying a balance fell from 50% to 45% from April 2020 to December 2021, according to the U.S. Government Accountability Office.
With those programs long expired—and stimulus payments long spent—many American households are struggling in the new economic environment, where almost everything is more expensive than it was at the start of the pandemic. (The Fed’s data doesn’t even take into account debt accrued on buy-now, pay-later platforms, which are more popular than ever, particularly among younger consumers who already have credit card debt.)
For those struggling with credit card debt, Wirick recommends making a list of every credit card, balance, interest rate, and minimum payment, and then focussing on paying off the card with the highest interest rate first.
“This debt is going to keep snowballing and snowballing, so you have to decide what steps need to be taken,” says Wirick. “The longer you wait to change your habits, the harder they form.”
