Risks Rise as More Than 50% of Cardholders Carry Balances Monthly

Around 111 million Americans are currently carrying monthly balances, often at interest rates in excess of 20% — with some paying over 30%, according to analysis from The Century Foundation and Protect Borrowers.

“More than half of credit cardholders are carrying debt month-to-month at crushing interest rates,” according to the analysis, which noted that the number represents more than 40% of U.S. adults.

The data points to borrowers who are regularly turning to credit to maintain their daily cash flows, creating a consistent flow of consumers into higher-risk lending segments.

It’s also a market signal. What initially appears to be a consumer alert to lenders (the high level of delinquency) also sends a message that many borrowers rely upon credit for day-to-day expenses.

The rising number of high balances with elevated annual percentage rates (APRs) is creating new borrower profile characteristics. As debt persists, the pressure from payments will continue, leading to borrowers missing more payments. As credit utilization increases, credit scores will decrease.

This will cause prime borrowers to move into the near-prime category and near-prime borrowers into the subprime category — creating a growing “newly subprime” consumer segment: those who have in the past been able to qualify for lower cost credit, but no longer do.

Subprime borrowers now carry more than 20% of the outstanding credit card balances, and it appears this percentage will continue to balloon.

Similar migration occurred before 2008, and after the pandemic stimulus faded, but this cycle includes a wider variety of income levels and higher borrowing costs. This compressed the timeline, leaving lenders with less opportunity to react and an increased motivation to engage earlier.

What makes this so critical is that people are carrying their debt longer. As Mike Pierce, Executive Director of Protect Borrowers, put it, “Across the economy, families are struggling with rising costs and turning to debt to stay afloat.”

Lenders can continue to earn interest and charge additional late fees and/or penalty pricing. The Century Foundation emphasizes just how sustainable this revenue stream is. It says that since 2010, American consumers have paid approximately $2.1 trillion in credit card interest.

Although this has historically been a part of the business model, the scale is changing. About 27.5 million Americans are making only the minimum payment. They are locked into long-term repayment cycles that generate interest and fee income. These balances are a sustained revenue generator.

Demand for consumer credit has been repriced. Consumers who previously qualified for lower-cost credit have moved to other lending options to obtain liquidity, including second-look programs, fee-heavy cards, and installment-type financing.

When the number of options for prime borrowers declines, higher-cost alternative forms of credit increase. This is why we see growing activity in the subprime issuer space, near-prime fintech lenders, and in the BNPL arena that provides financing to customers with lower credit scores.

We also see an increase in demand from buyers of debt and distressed portfolios.

Some lenders are beginning to expand their second-look programs and tighten segmentation. They are leaning on fee-based products as more consumers fall outside the prime tier.

We are currently at the middle stage of the credit cycle as balances and delinquencies increase. But charge-off levels are still below their peaks.

That creates a small window for lending. Firms that can reach their customers earlier will have more latitude to assess risk and adjust the terms of the loan before the loan becomes worthless.

Borrowers are already moving through the lending system. The question is which lenders will recognize this migration early enough to correctly price loans.

While U.S. credit card debt has reached approximately $1.28 trillion, it can also signal an expanding marketplace.

The number of people borrowing money, keeping a balance on their accounts, paying high interest rates, and moving into higher-risk credit tiers has expanded the potential marketplace for non-prime credit products.