As consumers continue to struggle with still-rising costs of living, new research proves that rising household debt levels are as much a cause for concern as prices.
The Century Foundation, a progressive, independent think tank, finds that debt payments are rising eight times as fast as take-home pay. As a result, 52 cents of every worker dollar gained have been lost to paying down debt.
“You cannot assess whether workers can truly afford to live without accounting for what they owe and more recently, working families are finding themselves in unprecedented levels of household debt,” states the report. Further, this research concludes that racial and gender wealth gaps together make it harder for people of color to pay off these debts — especially for credit cards and auto loans.
“In general, people of color pay higher interest rates on credit so that a dollar of debt costs more to service, widening the gap between gross pay and what a worker keeps even more. … The racial income gap grows after including debt obligations because workers of color carry more debt, at higher interest rates, and with less savings to cushion against shocks. The affordability crisis is not race-neutral.”
To put it another way, consumers with low or no financial cushions are hit the hardest when rising levels of debt come due.
“[S]pending sustained by rising debt means households are borrowing more to maintain a standard of living their wages no longer support. This is neither sustainable nor a sign of financial health,” adds the report. “Over the decade from 2013 to 2023, credit card interest rates have skyrocketed, from 12.90 percent in 2013 to 22.8 in 2023, and are now at the highest level ever recorded. Workers whose paychecks are already not going nearly far enough are spending billions on interest payments alone each year.”
These disparities are not explained by differences in creditworthiness. Among super-prime borrowers, Black workers’ payments still claim 13.6% of take-home income compared with 8.4% for white workers. The racial gaps exist within every credit tier and income quintile.
The most recent Federal Reserve Bank of New York’’’s Quarterly Report on Household Debt and Credit reached a similar conclusion: Credit card balances rose by $21 billion and stood at $1.26 trillion, and auto loan balances increased nationwide by $28 billion to $1.71 trillion.
“[N]ew delinquencies for auto loans and credit cards remain at elevated levels, a trend we’ll continue to monitor,” said Joelle Scally, the bank’s economic policy adviser.
This September, Experian, one of the nation’s major credit bureaus, found that while the average credit card rate was 19.25%, overall rates ranged from 7.9% to as high as 34.52%. Interest rates varied due to the card type, issuer, and whether the card offers rewards, cash balance transfers, introductory low APRs, or cash advances. In general, cards that include cash advances typically charge the highest APRs, and low introductory rates escalate after the promotional period ends.
“Consumers with excellent credit may qualify for rates in the mid-teens or lower, while those with fair or poor credit often see rates in the 20 to 30 percent range,” according to Experian.
Auto lending is another significant debt sphere for the nearly 92% of American households who rely on a personal vehicle to manage their daily lives.
At mid-year, the average monthly payment for a new car was $765, and the average payment for a used car was $542, according to Experian. But consumer credit scores bring vast differences in interest rates that determine how challenging payments become.
Today’s average 21.62% interest rate charged for used-car buyers with deep subprime credit scores ranging from 501-600 is three times higher than the 6.29% average for super prime borrowers whose credit scores are 781-850.
Subprime borrowers make up nearly two-thirds of all delinquent loans — those with payments at least 90 days late — according to the Federal Reserve Bank of Philadelphia. Moreover, 62% of these loans taken out from 2021-2023 were in default by this April with higher debt-to-income ratios across all credit score categories.
“Rising household debt is a symptom of broader failures within our economy, and in order to address those challenges, policymakers need an agenda that not only addresses the immediate problem of outstanding debt but also takes steps to head debt off at the source,” concludes The Century Foundation report. “Enacting debt relief, raising wages and expanding bargaining rights, cracking down on predatory lenders and financial practices, and expanding public provisioning are all necessary steps to strengthen the labor market.”
Charlene Crowell is a senior fellow with the Center for Responsible Lending. She can be reached at Charlene.crowell@
