Inflation has been busting all budgets, but something worse has put millions of millennials in the financial hot seat.
What happens in the coming year could be critical to whether younger Americans can make ends meet or suffer a financial reckoning.
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Soaring inflation isn't the only problem
Everything from lattes to used cars costs more than it did only a few short years ago when covid-era policies lined pockets with stimulus money.
But inflation, while onerous, is less of a problem this year. At its peak, the Consumer Price Index, one of the most common inflation measures, was up more than 9% year-over-year in 2022. It grew by a much more manageable 3.7% in September.
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While slower inflation is good news, millennials aren’t really doing any better financially. Slowing inflation should offer millennials an opportunity to catch up, but that’s not happening.
According to the Bureau of Labor Statistics, real wages, or pay minus inflation, are negative, so households are still losing ground.
Given that higher costs are still outpacing paychecks, millennials are forced to tap savings or, worse, credit cards to make up the difference.
Unfortunately, much of the savings they stashed from stimulus payments during the covid lockdowns has already been spent. As a result, credit cards are increasingly doing the heavy lifting.
But the reality is that those mounting credit-card balances have put millennials in the worst financial shape of any generation.
According to the New York Fed’s Quarterly Report on Household Debt and Credit, millennials, whom the Fed defines as those born 1980 to 1994, are struggling the most to make increasingly larger credit card payments.
The report says Americans’ credit-card balances in Q3 increased by $154 billion from one year earlier, the largest increase since it began reporting these numbers in 1999.
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Americans now owe $1.08 trillion to credit-card issuers, but it’s not just bigger balances that have millennials struggling.
Interest rates are higher and burdensome
The Federal Reserve has increased the federal funds rate by 5.25 percentage points since March 2022 to slow inflation. Those hikes are working, but they’ve come at a stiff cost to borrowers.
Banks are spending more to finance loans and as a result, they’re charging cardholders more to protect against the risk of defaults.
The result is that the average credit card carried an interest rate of 21% in the third quarter, up from below 15% in Q1 2022, according to WalletHub.
The harsh reality is these higher rates on bigger balances are driving increasingly more millennials behind on their payments.
While baby boomers and Gen X are doing better, millennials' delinquency rates are now above prepandemic levels. Those with balances above $20,000 and credit-card borrowers with student loans and auto loans have the highest delinquency rates.
That's unsurprising given the average cost of a new car is over $48,000, up $10,000 since September 2020, according to Consumer Reports and Kelley Blue Book. Student-loan payments had been paused because of policies put in place during the covid pandemic, but those payments restarted in October.
Major credit card issuers are already feeling the pinch. Discover DFS recently disclosed that its charge-off rate last quarter climbed by 1.8 percentage points from a year earlier to 3.5%. The situation is similar at Capital One COF. Its charge-off rate averaged 4.4% in Q3, well above the 3.9% rate recorded in September 2019 before covid.
Delinquent payments cause ripple effects
If bigger bills mean more millennials fail to make payments on time, it could have significant ripple effects. Delinquency and default can significantly lower credit scores, making home buying even more challenging.
As it stands, millennials are already behind when it comes to purchasing homes. According to Apartment List, just 42% of millennials owned homes by age 30, versus 51% of baby boomers.
The median home listed for sale was priced at $425,000 nationwide in October, according to Realtor.com. That's up 13% from a year earlier and significantly above 2018 when prices were below $300,000.
Meanwhile, the average 30-year mortgage rate is flirting with 8%, the highest in more than 20 years. The National Association of Realtors reports that home affordability is the worst since at least 1989.
The combination of mounting credit card debt borrowed at sky-high interest rates, student loan payments restarting, and housing unaffordability at lows could mean millennials are caught in a financial spiral that won’t be easily fixed.
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