The United States banned debtors’ prisons under federal law in 1833. That sure didn’t stop us from kind of just turning the whole country into a big debtors’ prison though.
It wasn’t that long ago when Americans achieved their highest personal savings rate on record. Still, Americans have generally been much better spenders than savers throughout the modern era — hardly shocking given that several of the largest and most powerful companies in existence make almost all their money from advertising.
Someone is trying to sell us something pretty much all the time. Advertising is so lucrative because it works: people can’t help but soak up some of the constant pitches. Sure, things that we actually need have gotten more expensive with inflation running higher than normal over the past two years or so. Still, as a guy who eats a lot of rice and beans, it’s hard to convince me that anyone who is employed must spend themselves into the poorhouse in order to stave off starvation.
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At any rate, despite or perhaps because of high inflation, Americans have been spending a ton of money. Increasingly, they seem to be spending lenders’ money.
According to the latest figures, household debt hit a record $16.5 trillion in the fourth quarter of last year. Credit card debt accounted for a fairly substantial chunk of the total, at $986 billion. This too is a record, with the pre-pandemic high for credit card balances reaching just $927 billion.
This is not a convenient time to be racking up debt. According to the online financial services site Bankrate, Americans’ credit cards now have an average annual percentage rate of 20.4 percent. This is the highest average credit card interest rate on record since tracking for this metric began in the mid-1980s. More Americans are carrying a balance on their credit cards month-to-month, and for them, such oppressive interest rates could darken an already desperate financial situation.
Signs are emerging that some Americans are at a breaking point. For instance, the proportion of auto loans that are 60-plus days delinquent has reached a record high. Part of this probably has to do with the fact that a record number of Americans have been buying expensive cars, with more monthly auto loan payments topping $1,000 than ever before in history. Credit card delinquencies have also ticked steadily upward over the last several quarters.
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Both consumer and commercial bankruptcy filings are up for the first few months of 2023 compared to the same time period last year. Even so, bankruptcy filings are still below pre-pandemic levels. Experts are quick to point out that consumer bankruptcies tend to lag two to three years behind the onset of serious financial trouble, as many people attempt to hang on as long as possible before resorting to a bankruptcy court.
With interest rates going up, people should theoretically be less inclined to take on more debt. That has not been the case for consumers — at least not yet. Consumer spending surged in January, and although it was still up for February, consumer spending did slow considerably in February. A lot of that spending is apparently being fueled by debt.
So far, there hasn’t been widespread fallout from consumers spending themselves into record levels of debt (that is, unless one counts the fact that too much consumer spending is a big underlying cause of inflation). But record consumer debt levels are never a good thing. Eventually the chickens are going to come home to roost.
A whole lot of Americans can fail to repay their debts before there is much of an effect on the broader economy. For heavily indebted Americans, however, the coming day of reckoning will be rough. When you hit that credit limit ceiling, it’s never a good day.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at [email protected].