Household financial distress grew in 2023 driven by increases in credit card debt

The White House has been messaging that President Biden has successfully rebuilt the US economy. With a decrease in inflationary pressures in the market, unemployment still near a historic low, and GDP continuing to grow, Democrats are hoping that these accomplishments will propel them to victory in 2024.

However, new data from the Federal Reserve shows that the picture is not so rosy at the household level. Credit card debt drove households into financial distress at levels not seen since The Great Recession in 2008 and 2009 last year. For an individual to enter a period of financial distress, they must have an “account that is 30 days or more past due, excluding severe derogatory debt (more than 120 days past due).” Looking at credit card debt in particular, the Fed found that financial distress was higher than pre-pandemic levels, with 3.87 percent of households finding themselves in this position. This rate is much lower than the forty-eight percent that carry a balance, even for a short period, each month on their credit card.

What is driving people into debt?

When taking a bird’s eye view of the economy, it is essential to remember that economic indicators often do not tell the whole story. For instance, while unemployment remains under four percent, labor force participation remains lower than the rate captured before the pandemic led millions to lose their jobs. Additionally, while real wages have increased since 2019, they are only up 1.3 percent. In other words, there is a smaller workforce, relative to the population size, than was seen before the pandemic, and wages have not risen much over the last four years.

As the pandemic-related assistance, such as enhanced unemployment benefits, the expanded child tax credit, and other tax credits and benefits, came to an end, households started relying on credit cards to cover their expenses. The eligibility expansion of the Supplemental Nutrition Assistance Program (SNAP) also ended in 2023. Hunger was already rising in the United States before the benefits were cut. As benefits declined and inflation increased food prices, many people turned to their credit cards. For some, these expenses and others forced them to carry a balance that put them in a vulnerable economic position.