Higher prices are affecting everyone. From gas to groceries, everything costs more these days, and strained household budgets are causing people to increasingly use credit cards and borrow money to get by. Consequently, American families are falling deeper into debt. Let’s explore what that means.
The Issue
The amount of money U.S. households are bringing in is not keeping up with an overall heightened cost of living. In fact, median income over the last two years dropped 3 percent while, partly due to increased medical and housing costs, the nation’s cost of living jumped almost 7 percent. And that’s taking a toll on families who in January owed an average of $155,622, according to CNBC, amounting to more than $15 trillion — a 6.2 percent increase from the same period last year.
The Fallout from Rising Costs
Since March 2020, when COVID-19 began its rampage, some 78 percent of U.S. residents received some form of pandemic assistance. A NerdWallet poll of some 2,000 adults found that those funds went to either necessities, debts, or savings, or some combination thereof.
The good news was that Americans erased some $83 billion in credit card obligations, which constitutes a record. The bad news is that credit card debt is again increasing, commensurate with student loan, vehicle, and mortgage debt. In fact, more than one-third of poll respondents reported that their household finances have worsened over the past year. And that was before full-fledged inflation.
This means that not only did the pandemic cause millions of Americans to lose their jobs, but because people are now being hit with inflation — and increased costs for necessities such as housing, food, medical care, and transportation — it’s challenging for many to catch up.
Surging Inflation
Prices, it seems, are increasing across the board. The Labor Department’s consumer price index shot up 9.1 percent in June from the year before, as the cost of eggs rose 33 percent over the past year, airfares 34 percent, and gasoline 61 percent, although fuel prices have recently begun to drop somewhat. Even with those increases, you can reach your finance goals at Achieve, the sole digital personal finance company that was established to help people like you flourish.
Mixed Signals
Growth appears to be faltering, home sales are waning, and experts see a possible recession on the horizon. But it’s a confusing time, too, as consumers continue to spend, albeit at a slower pace, and jobless rates remain markedly suppressed. Amid all that, prices have reached 40-year highs, and the Fed has moved to defang inflation by increasing interest rates. In fact, the Federal Reserve boosted its short-term interest rate by three-quarters of a percentage point in June, its largest increase in the last 38 years. That action is making it pricier for households and business to borrow money.
Arguably, something needs to be done. Last year’s economy grew 5.7 percent last year – a 37-year high. However, in the first quarter of this year, the economy contracted at a 1.6 percent annual pace.
The Fallout
Prices are increasing faster than income. In June, for example, average hourly pay dropped 3.6 percent from a year ago, adjusted for inflation. This means that more and more Americans are relying on credit cards to make ends meet. And as we say, such use is now more expensive.
This is what America’s growing debt looks like: credit card balances rose $46 billion in the second quarter, marking a 5.5 percent hike from the January-March period. This is in addition to an increase in new credit card accounts. The 13 percent year-over-year second quarter increase was the largest such jump in more than two decades.
For households, high credit card utilization rates are typically among the first signs of looming financial woes.
So, yes, American families are falling deeper into debt, but they do have options, including enlisting the help of Achieve, to get them back on track.
