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AMERICAN DEBT STINGS LIKE NEVER BEFORE IN NEW ERA FOR HOUSEHOLDS

Credit woes are souring Americans on the economy and could be a drag on
President Joe Biden’s reelection bid.

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Denise and Paul Nierzwicki blame Biden for what they see as a gloomy economy and
plan to vote for the Republican candidate in November.

Photographer: Jon Cherry/Bloomberg

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By Claire Ballentine and Eliza Ronalds-Hannon
March 15, 2024 at 12:00 PM GMT+1
BookmarkSave

After years of managing household budgets through the stress of the worst
inflation in a generation, US families are increasingly pressured by a different
kind of financial squeeze: The cost of carrying debt.

Two years after the Federal Reserve began hiking interest rates to tame prices,
delinquency rates on credit cards and auto loans are the highest in more than a
decade. For the first time on record, interest payments on those and other
non-mortgage debts are as big a financial burden for US households as mortgage
interest payments.


INTEREST PAYMENTS BY US HOUSEHOLDS

Seasonally adjusted annual rate

Source: Bureau of Economic Analysis

The figures suggest a difficult reality for the millions of consumers who are
the engine of the US economy: The era of high borrowing costs — however
necessary to slow price increases — has a sting of its own that many families
may feel for years to come, especially the ones that haven’t locked in cheap
home loans. And the Fed, which meets next week for a policy decision, doesn’t
appear poised to cut rates until later in 2024.



As monthly debt payments take up more of workers’ paychecks, those consumers are
more exposed to potential economic contractions.

And the cost of money affects people’s perception of their own prosperity: A
February paper from IMF and Harvard University researchers posits that the
recent high cost of borrowing — which isn’t captured in inflation figures — is
key to understanding why consumer sentiment remains lackluster even as inflation
has moderated and businesses are hiring at a healthy pace.

That theory suggests the debt burden could be a drag on President Joe Biden’s
reelection bid, with the economy consistently registering as a top concern at
the ballot box.

Expand

Nikki CiminoPhotographer: Rachel Woolf/Bloomberg

Nikki Cimino, a 40-year-old recruiter living in Denver, said she finally saved
up enough to buy a condo last year, but missed out on the ultra-low interest
rates that had made homeownership more affordable in the early days of the
pandemic. Her 5.25% interest rate pushed her monthly payments to $1,650. After a
divorce in 2020, she’s shouldering $4,000 in credit card debt.

“I’m making the most money I've ever made, and I’m still living paycheck to
paycheck,” she said. “There's this wild disconnect between what people are
experiencing and what economists are experiencing.”


RELYING ON CREDIT

The Fed’s rate hikes, by design, make it more expensive for consumers to borrow.

Since the pandemic, families have taken on debt at a comparatively fast rate.
According to calculations by Wells Fargo economists, it took only four years for
households to set a new record debt level after paying down borrowings in 2021,
when interest rates were still near zero. Before that, the time from one debt
peak to the next was three times longer. And that increased debt load often
comes with a higher price. The typical charge on a credit card has climbed to a
record above 22%, according to the Fed.



It helps that many families are relatively well-positioned to service that debt:
Broad wage gains mean workers are pulling in larger paychecks, and higher home
prices have bolstered many households’ net worth. While the share of income
going to debt service is higher than it was three years ago — when stimulus
checks were making it easier for people to throw money at their credit card
bills — it is still low by historical standards.



And part of the reason some Americans were able to take on a substantial load of
non-mortgage debt is because they’d locked in home loans at ultra-low rates,
leaving room on their balance sheets for other types of borrowing. The effective
rate of interest on US mortgage debt was just 3.8% at the end of last year.

Yet the loans and interest payments can be a significant strain that shapes
families’ spending choices.

“Many consumers are levered to the hilt — maxed out on debt and barely keeping
their heads above water,’’ said Allan Schweitzer, a portfolio manager at
credit-focused investment firm Beach Point Capital Management. “They can dog
paddle, if you will, but any uptick in unemployment or worsening of the economy
could drive a pretty significant spike in defaults.”



For Denise and Paul Nierzwicki, credit cards are the only way to make ends meet.
The couple, ages 69 and 72, respectively, have about $20,000 in debt spread
across multiple cards, all with interest rates above 20%.

The trouble started during the pandemic, when Denise lost her job and a business
deal for a bar that they owned in their hometown of Lexington, Kentucky, went
bad.

They applied for Social Security, which helped, and Denise now works 50 hours a
week at a restaurant. Still, they’re barely scraping together the minimum
payments for their credit card debt.

Expand

Denise and Paul NierzwickiPhotographer: Jon Cherry/Bloomberg

The couple blames Biden for what they see as a gloomy economy and plans to vote
for the Republican candidate in November. Denise routinely voted for Democrats
up until about 2010, when she grew dissatisfied with Barack Obama’s economic
stances, she said. Now, she supports Donald Trump because he lowered taxes and
because of his policies on immigration.



“We had more money when Trump was president,” she said, noting that three years
ago her credit card debt was less than half of what it is now.



The Nierzwickis are not alone in struggling to stay on top of debt. Among
middle-class adults with credit card payments, more than a quarter say they’ve
been “behind” at some point in the last year, according to exclusive data from
the Harris Poll for Bloomberg News. New York Federal Reserve data shows
credit-card balances turning delinquent — more than 30 days late — at an annual
rate of 8.5% last quarter.



The high borrowing costs — and how households manage them — pose some risk to
the broader economy.

“As rates rose in 2023, we avoided a slowdown due to spending that was very much
tied to easy access to credit,” said Shannon Grein, an economist at Wells Fargo.
“Now, credit has become harder to come by and more expensive,’’ she said,
calling the change “a significant headwind to consumption.”

Mohsin Meghji, managing partner of M3 Partners, a firm that consults for
troubled companies, is girding for the reverberations of that kind of pullback
by consumers.

“Any tightening there immediately hits the top line of companies,” said Meghji.
For those companies — heavily indebted themselves after years of easy borrowing
— “there’s no easy fix,” he added.

Of course, consumers can try to refinance their debt after the Fed lowers rates.
But the timeline and magnitude of cuts is uncertain, and refinancing fees can
sometimes outweigh the benefit.


STUDENT DEBT BURDEN

The return of student loan payments is adding to many borrowers’ financial
stress.



Brittany Walling, a 29-year-old in Columbus, Ohio, has about $80,000 in federal
student loans and $20,000 in private debt from her undergraduate and graduate
degrees. That’s alongside $6,000 in credit card debt, which she accumulated when
she was unemployed for a six-month stretch in 2022.



She’s been living paycheck to paycheck, she said, on her $50,000-a-year salary
working for the public health department.

“I can't even save, I don't have a savings account,” she said. “I just know that
a lot of people are struggling, and things need to change.”

For Walling, that sentiment isn’t necessarily going to be a decisive factor at
the ballot box. While she said she was disappointed that Biden’s student debt
forgiveness plan was struck down by the Supreme Court, her views on abortion and
transgender rights will likely keep her from voting Republican.

Yet the issue overall looks like a headwind for Biden, as it shapes the economic
outlook of people like the Nierzwickis.

“Maybe the Fed is done hiking, but as long as rates stay on hold, you still have
a passive tightening effect flowing down to the consumer and being exerted on
the economy,” said Grein, the Wells Fargo economist. “Those household dynamics
are going to be a factor in the election this year.”

Plus, swing-state voters in a February Bloomberg News/Morning Consult poll said
they trust Trump more than Biden on interest rates and personal debt.



Cimino, the Denver condo buyer, says despite her debt load, she feels lucky that
she makes $65,000 a year and owns a home — a situation that leaves her better
off than many others.



“Being middle-class these days,” Cimino said, “is just carrying around a lot of
guilt.”



— With assistance from Alexandre Tanzi

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