In March, the Century Foundation found that half of credit card holders weren’t able to pay their balances every month, and together carry $1 trillion in credit card debt. As of last October, which marked two years since the expiration of the Biden-era pause on federal student loan repayments, 11 percent of borrowers had fallen three or more months behind, according to a FICO Credit Score report released a month ago. And borrowers are also behind on auto loan and mortgage payments, after losing the breathing room they got from Covid-era payment programs.
All of these problems share a core cause: Prices and interest rates are both high. “Stuff’s too expensive,” Pierce said. “People are turning to debt to be able to deal with routine expenses that they were paying for in cash as recently as half a decade ago, and then that’s having all of these spillover effects across other kinds of consumer credit.”
Since families need their homes and their cars, they’re likely to keep paying their mortgages and auto loans first, but the monthly costs of trying to keep up are knocking their budgets out of whack. To cover price increases on regular goods like groceries, they’re using credit cards and buy now, pay later, or BNPL. In the Lending Tree survey, 29 percent of borrowers said they’ve used BNPL to buy groceries, compared to 14 percent two years ago, and 54 percent said they wouldn’t be able to make ends meet without these short-term loans.
The lowest-income families are hit the hardest by these increasing costs, and they’re missing their payments at the highest rates. But those with higher incomes are also falling behind, and credit scores overall are falling. As the financial pressure builds, borrowers begin falling behind on more critical payments, like mortgages.
Some of these statistics are the worst they’ve been since the Great Recession. Pierce doesn’t think we’re headed for a catastrophe quite that bad, but he does think borrowers need a rescue. It would help if Trump fulfilled his campaign promise to cap credit rates at 10 percent, Pierce said. In the meantime, states can pass new laws to cap interest rates and protect borrowers.
In deciding what to buy, when to buy it, when to take on and pay off debt, and other important financial matters, businesses and buyers need to have some sense of where the economy is headed and what it will mean for them. But that’s impossible under the Trump administration. The president seesaws between promises of a peace deal with Iran and eradicating a “whole civilization.” Trump claims the cost of gas will plummet once a deal is struck, while his energy secretary says gas prices won’t fall back below $3 until next year. And on top of that, we’re about to get a questionable new Fed chair handpicked by Trump.
So it’s safe to say that many Americans are feeling uncertain, which means the state of the economy could become even more precarious as lenders mitigate risk by raising lending standards and interest rates, and families pull back on spending. If we’re not in a debt crisis yet, we could be hit with one very soon.
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