CNN
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Ariel Barnes fell into a spiral of credit card debt in college and, ten years later, she still hasn’t come out of it.
Barnes has maxed out seven credit cards and is struggling to make minimum payments on $30,000 of credit card debt.
“The interest is so great it’s hard to get out of it,” Barnes, 28, who lives in Jackson, Mississippi, told CNN in a telephone interview Thursday.
Barnes is hardly alone.
About one in seven (15.3%) Gen Z credit card borrowers have maxed out their credit card, according to a new study from the Federal Reserve Bank of New York. (The New York Fed has defined Generation Z as borrowers born between 1995 and 2011, although others mark the cutoff date as 1996 or 1997).
For comparison, only 4.8% of Baby Boomer borrowers and 9.6% of Gen Xers have maxed out their credit cards, which can be a sign of a serious cash flow problem.
The results highlight very different conditions hidden by national economic statistics.
Barnes attributes her current situation to poor financial decisions made while she was in college, which forced her to live at home and delay major life events.
“I want children. The clock is turning. But I can’t afford to have children,” she said. “I had to go to therapy because it’s very mentally stressful.”
More and more Americans of all ages are falling behind on their bills, especially credit card bills. The New York Fed found that for all debt other than student loans, delinquency rates have been steadily increasing since falling to historic lows during the Covid-19 pandemic.
Credit card delinquencies have exceeded pre-pandemic levels and continue to rise. Serious delinquencies on credit cards, those 90 days late, have now climbed to 10.7%, the highest since 2012.
The findings show how pockets of financial stress continue to emerge in the U.S. economy after three years of high inflation.
“It’s concerning that so many Gen Zers are falling behind,” said Ted Rossman, senior industry analyst at Bankrate.com. “We’re seeing more and more people financing basic necessities like groceries and gas, and that can be a difficult cycle to break.”
Even as Wall Street stocks hit all-time highs and unemployment remains unusually low, millions of Americans struggle with the cost of living.
“The increase in serious delinquencies – those overdue for more than 90 days – is a cause for concern,” said Gregory Daco, chief economist at EY.
The New York Fed has found that there is a direct link between credit card capping and late payments.
According to the study, very few Americans who used 20% or less of their credit card limit fell behind on their bills.
However, the rate of transition to delinquency for those who have used more than 60% of their credit card limit has now exceeded pre-Covid levels and continues to rise, the New York Fed said.
The researchers said this trend is “particularly notable” for those who have maxed out their cards, meaning they are using 90 to 100 percent of their limit.
As many as a third of borrowers became delinquent last year, compared with less than a quarter before the pandemic, the New York Fed said.
“While most commentators are talking about a soft landing for the economy or for the consumer,” Daco said, “the latest data on credit conditions points to multiple economies, multiple consumers, affected by varying degrees by the higher cost and interest rate environment.”
Maxing out credit cards can hurt borrowers’ credit scores. According to the FICO score calculation, the balance-to-credit limit ratio is the second most important category in determining credit scores.
“FICO will be closely monitoring this trend over the coming quarters to better understand whether this is simply a return to pre-pandemic consumer behaviors,” Tommy Lee, senior director at FICO, told CNN in an email.
The New York Fed explained that part of the reason Gen Z borrowers are maxed out is because they have much lower credit limits. Many young Americans haven’t had time to build credit histories and scores that would allow them to borrow more.
For example, the median credit limit for the Gen Z borrower is just $4,500, compared to $16,300 for millennials and $21,800 for Gen X, the New York Fed said.
The New York Fed declined to share historical data on credit cards maxed out by generation.
In a call with reporters, New York Fed researchers explained that this is a “typical age range” in which younger borrowers have used more of their credit card limit.
Lee, the FICO director, said history shows that as consumers age and their credit experience increases, their credit limits also increase.
Of course, it’s not just younger users maxing out their credit cards.
The New York Fed found that borrowers who live in low-income areas are also more likely to be maxed out on their credit.
About 12% of borrowers living in neighborhoods with the lowest 25% of income have maxed out their cards, according to the report. That’s more than double the 5.5% of borrowers living in the highest income neighborhoods who are at the maximum.
There’s never a good time to carry a credit card balance, but right now is arguably the worst time. The average credit card interest rate is 20.66%, according to Bankrate. This is just below the record of 20.75% set last month.
Daco said Federal Reserve officials need to take into account the credit card stress some Americans are feeling when deciding when to lower interest rates.
The Fed faces a delicate balance.
A premature rate cut could worsen inflation. But waiting too long could put even more pressure on borrowers, especially if the job market slows and more people struggle to find work.
“The risk of excessive tightening could have unintended consequences that would further weigh on household finances,” Daco said.
Experts say there are possible solutions for people who feel trapped by credit card debt.
Rossman, the Bankrate analyst, said options include:
- Transferring high interest credit card debt to balance transfer cards offering 0% interest for up to 21 months
- Seeking Nonprofit Credit Counseling
- Are you looking for ways to increase your income and reduce your expenses?
“I know it’s easier said than done,” Rossman said, “but it’s so important to make paying off credit card debt a priority.”
CNN’s Alicia Wallace contributed to this report.