Millennials Struggle to Repay Debt as Rates, Balances Spike

Amid the economic flux of post-pandemic America, millennials find themselves in an escalating credit quagmire as household debt surges and banks hike credit card interest rates.

The Federal Reserve Bank of New York’s third-quarter household debt and credit report uncovered the struggle of the generation with rising delinquencies, signaling a potential shift in the financial stability of a significant consumer segment.

The chart below illustrates a twofold financial squeeze—a spike in late credit card payments and a corresponding rise in credit card interest rates. The tandem trend reflects a reality for many American consumers, particularly millennials, as banks respond to the risk of late repayments by tightening the credit cost screw.

In the third quarter, the average Annual Percentage Rate (APR) for all credit card accounts jumped to 21.19 percent, up from 20.68 percent in the previous quarter, marking the highest rates since the Federal Reserve began tracking in 1994, said Lending Tree’s chief credit analyst Matt Schulz. More pointedly, the average for accounts accruing interest—those not settled monthly—now sits at 22.77 percent.

Newsweek has reached out to Schulz and Lending Tree via email on Wednesday.

The surge in APR implies that cardholders are now facing heftier monthly payments, as a greater portion of their payment goes toward the interest rather than the principal balance. With elevated APRs, compounded interest adds an extra cost to existing debt.

As credit card users grapple with soaring rates, the proportion of late payments has escalated. The New York Fed found that broad delinquency rates are at levels not seen since the first quarter of 2021, with 1.5 percent of millennials transitioning into “serious delinquency” at the 90-day mark.

The Fed’s report found a $228 billion increase in total household debt. Notably, credit card balances soared by $48 billion, hitting the highest year-over-year rise since 1999. Donghoon Lee, economic research advisor at the New York Fed, noted that while the upticks align with robust spending and GDP growth, they come as credit card delinquencies surpass pre-pandemic levels.

“The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans,” Lee said in the report.

Newsweek did not immediately receive a response from Lee when contacted via email Wednesday.

Millennials’ credit card delinquency transition rates are 0.4 percentage points higher than in the third quarter of 2019, the New York Fed found. In contrast, baby boomers, Generation X and Generation Z maintain rates close to 2019 figures.

It’s also imperative to note the disproportionate share of the debt burden on millennials. With an estimated total debt load from $8 trillion to $8.5 trillion for the third quarter, according to the New York Fed, millennials are shouldering roughly 49 percent of all household debt in America, which stands at $17.29 trillion.

The delinquency uptick isn’t just correlated to generations, the New York Fed found, as the broad-based increase glides across income groups and regions—yet millennials, alongside borrowers with auto or student loans, are disproportionately affected.

TransUnion’s insights echo the narrative. In the third quarter, TransUnion said bankcard balances reached an unprecedented $995 billion, with millennials eclipsing baby boomers in credit card spending.

The average consumer balance surged to $6,088, a 10-year high, reflecting a broader reliance on credit amid cost-of-living escalations and housing market challenges. But the reliance isn’t without consequences. Nearly half of millennials carry more credit card debt than emergency savings, TransUnion said.

The millennial debt landscape is further complicated by the resumption of student loan payments. Millennials with student loans owe roughly $32,800 each, which accounts for 30.26 percent of total student debt.

For millennials who find themselves in the crosshairs of credit debt, student loan debt and various types of unsecured debt, TransUnion said it expects a “payment shock” for the cohort, forecasting a significant financial strain for many borrowers.

In real estate, while millennials made up 32 percent of all home purchases in 2023, high mortgage rates and soaring prices led to a 37 percent year-over-year drop in mortgage originations. The New York Fed’s report confirms a $126 billion increase in mortgage balances, despite the drop in originations.

Yet, the rise in credit card delinquency, particularly among millennials, corroborates the distress signals flagged by climbing balances.