According to new research from the New York Federal Reserve, the percentage of cardholders between the ages of 18 and 39 who have fallen seriously behind on their credit cards has swelled in recent years. It’s no surprise given the rise in student loan debt, housing and child care costs and other expenses common among young adults.
Credit card holders in their 20s and 30s are having a tough time staying on top of their bills.
According to new research from the New York Federal Reserve, the percentage of cardholders between the ages of 18 and 39 who have fallen seriously behind on their credit cards has swelled in recent years. Seriously late payments – balances that are 90 days delinquent or more – by cardholders in their 20s have climbed at an especially fast clip, after falling sharply between 2009 and 2014.
Researchers at the New York Federal Reserve think part of the reason why late payments on credit cards have spiked lately is because so many more young people now own a credit card. For example, 52 percent of consumers in their 20s currently own at least one card, says the New York Fed – up from just 41 percent of 20-somethings in 2012.
However, today’s 20 and 30-somethings are also contending with a growing number of financial stressors that may also be contributing to their inability to pay their bills. For example:
Borrowing costs have risen sharply over the past three years
Interest rates on all variable rate loans have climbed significantly since 2015 when the Federal Reserve began gradually raising its bench mark interest rate, the federal funds rate.
However, it has become especially costly to borrow money on a credit card. Over the past three years, for example, the average minimum APR on new credit cards has climbed by more than 2-and-a-half percentage points – enough to potentially cost cardholders hundreds of dollars more in interest if they carry a big balance.
The average minimum card APR is now at an all-time record high of 17.73 percent, according to the CreditCards.com Weekly Credit Card Rate Report. Meanwhile, the average median APR on new credit cards – which is closer to what many young people are likely paying – is currently 21.36 percent, while the average maximum APR currently runs as high as 24.99 percent.
As a result, many young cardholders (who often don’t have enough credit history to qualify for a card’s lowest rate) are facing significantly higher credit card bills. If a cardholder owes $4,000 on a card with an 18 percent interest rate, for example, their monthly minimum payment could run as high as $100 or more. Meanwhile, their balance could more than double over time if they only pay the minimum amount due, forcing them to pay more than $5,000 in interest.
For those cardholders who are paying APRs well above 20 percent, their costs may be even tougher to manage. It’s not uncommon nowadays for the maximum APR on a general market credit card – even one marketed to consumers with good to excellent credit – to run as high as 26 to 27 percent or more.
Record high APRs have attracted the attention of lawmakers, who have sharply criticized the higher rates. Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, for example, recently proposed capping credit card interest rates at 15 percent, which would be a huge departure from what many young people are currently paying to own a credit card.
Many young borrowers are struggling to pay back their student loans
Many young adults are also struggling with record high levels of student loan debt, further crimping their ability to manage all their bills. According to the Federal Reserve Bank of St. Louis, the percentage of households headed by someone between the ages of 25 and 34 with student loan debt has roughly tripled since the 1980s. Around 46 percent of households headed by young adults owed student loans in 2016.
Meanwhile, total loan balances have also soared. According to the New York Federal Reserve, outstanding student loan debt now totals $1.49 trillion (while total household debt is currently at $13.67 trillion).
As student loan balances rise, many former students are defaulting on their loans. Delinquencies on student loans have fallen somewhat since 2013. However, they have risen significantly over the past year as a growing number of students fail to pay even the minimum amount due on their loans.
Housing costs are also rising
Adding to young adults’ costs, housing has also gotten more expensive in many cities – especially in large cities where there tends to be a higher concentration of jobs. According to new research by the property database ATTOM, for example, rents are rising faster than people’s wages in 52 percent of U.S. housing markets. Meanwhile, home prices are outpacing wage increases in 80 percent of housing markets.
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Childcare costs continue to be high
Many young people in their 20s and 30s are also putting substantial portions of their monthly income toward child care, which may also be making it harder for them to stay on top of their bills.
According to Child Care Aware, the average parent of a child under 4 spends $9,649 a year on child care. However, costs vary widely, depending on a child’s age and where their parents live. For example, day care in California can run as high as $16,452 a year, on average. In Tennessee, the average yearly cost of center-based care is around $8,500.
A recent study by Experian found that parenthood can have a significant impact on parents’ financial health – including their credit scores. For example, the study found parents tend to have lower FICO scores, on average. They also tend to have more debt.
“Starting a family can be expensive and Americans have the debt to show for it,” wrote Experian’s Stefan Lembo Stolba in a blog post. “U.S. consumers with children have anywhere from 14 percent to 51 percent more total debt than the national average.”
Parents are especially likely to carry bigger credit card balances, Experian’s study found. For example, the average family with two children owes $8,025 on their credit cards – $1,580 more than the national average.
Many people in their 20s and 30s aren’t just dealing with higher interest rates on variable rate loans, such as credit cards. They’re also contending with rising living costs – some of which are outpacing people’s earnings. That, in turn, is stressing people’s budgets, making it even harder for some credit card holders to manage all their bills.