According to Bloomberg News, the US credit card bills have escalated significantly in the last quarter. Americans have started spending with their credit cards to what it was in the pre-pandemic time, returning to their older spending habits.
Balance from credit cards surged every quarter in 2021 up to the year-en,d recording the figure at $856 billion, as the Federal Reserve Bank of New York stated on Tuesday. The largest gain was in the fourth quarter gain recording figures that date back to 22 years. While the total amount has not reached the pre-Covid levels, the wider gap is narrowing relatively quickly.
Last year, it was found that new mortgages reached historic highs while auto loans escalated, indicating steep price increases for cars and homes, as said in the quarterly report by Fed on household debt and credit.
As the cost of new and used vehicles has risen, buyers have borrowed money to fund their purchases to cover the extra costs. However, given the scenario, a long-term financial load will be on the households stuck with bigger loan payments, despite the cost of used vehicles likely to come down from the peak figures.
Bloomberg News also reports that overall, household debt in the United States surged by $333 billion to $15.6 trillion in the last quarter, which is $1.4 trillion higher than towards the end of 2019. The bulk increase came from mortgage balances, and the biggest component of household debt is recorded with a 70% share. Leaving aside student loans, other types of debt witnessed an increase.
As interest rates escalate, it becomes more difficult for debt to service their debt. The average 30-year mortgage rate surged by 50 basis points last year, and it has gained by another 40 since. This implies that a buyer can afford a house that costs approximately $350 000 against $40,000 per year back, a 12% reduction.
The increase in home prices during the pandemic has led to an improvement in the position of equity for several millions of homeowners. Yet, as per the reports, the ban is being cautious about whom they are extending a loan to as per the report. Out of the more than $1 trillion in debt related to new mortgage last quarter, around two-thirds was meant for borrowers with credit scores above 760, which falls in the higher threshold.
Approximately 2% went to subprime debtors, which is in sharp comparison to 12% average as was seen between 2003 and 2007, before the Great Recession, as per the Federal Reserve. Bloomberg News also states that there were as many as 81 million mortgages during the last quarter, registering a drop from more than 98 million mortgage accounts during the beginning of 2008.
The second highest debt component is student loans in US households held at $1.6 trillion in the last quarter. The increase in 2021 was the minimal annual profit in almost twenty years as hundreds of thousands of lesser numbers are going to college now.
Approximately 45 million Americans with student loans are expected to resume their loan payments in May, which will be about two years post the pandemic freeze. Almost one-third of debts are student loans held by students between 18 and 29 years.
Collectively, the Americans owe $1.8 trillion in student debt, as per different measures provided by the Federal Reserve. As per critics, it is a broken system that leads to crippling economic mobility, affects women the worst, and bridges the racial wealth gap.
