Credit card debt hits $1.26 trillion as K-shaped economy persists

New York Fed data showing credit card balances at $1.26 trillion undercuts Treasury Secretary Scott Bessent's claim that the K-shaped economy is over.

Credit card balances climbed to $1.26 trillion in the second quarter, New York Fed data showed, undercutting Treasury Secretary Scott Bessent's declaration that the K-shaped economy is over.

"To us, it reflects this K-shaped economy," New York Fed researchers said in the report. "There are a lot of households that live paycheck to paycheck."

Total household debt fell $13 billion to $18.8 trillion, a 0.1% decline, while mortgage balances dropped $74 billion to $13.1 trillion. Home equity lines of credit rose $13 billion to $459 billion, $142 billion above the low reached in the first quarter of 2022.

The data challenge Bessent's assertion last week that the K-shaped economy is over, a claim he said he was "sick of hearing." The widening gap between high-income households that keep spending and lower-income consumers who lean on credit carries direct implications for consumption, the largest driver of U.S. growth.

The K-shaped economy describes a recovery in which the top of the income distribution continues to prosper while lower-income households fall further behind — the two diverging lines of the letter K. The term gained currency during the pandemic recovery, when asset-owning households saw wealth surge while service workers faced job losses and rising costs. The New York Fed's quarterly report, released Tuesday, shows that divergence persisting even as aggregate balance sheets look stable.

The report's delinquency data offers a more nuanced picture. Overall delinquency on all forms of credit fell slightly to 4.7% of outstanding balances from 4.8% in the prior quarter, a sign that household balance sheets on average remain resilient despite a decline in inflation-adjusted incomes.

The share of credit card debt more than 90 days past due rose from 7.6% in late 2022 to 12.8% at the start of this year, prompting concerns about deteriorating household finances. But New York Fed staff economists said the pace at which households fall behind has been unchanged for about two years, with roughly 7% of balances flowing into delinquency each quarter since 2024. The rise in the overall share of delinquent debt reflects lenders keeping "stale, charged-off debts" on their books longer rather than a fundamental worsening in the incidence of delinquency, they wrote in an accompanying blog post.

Auto loan originations reached $211 billion in the quarter, a record in nominal terms, though not adjusted for inflation. The $19 billion rise in home equity loans is part of a four-year trend, with older homeowners using the credit lines to avoid refinancing at current high mortgage rates.

Personal consumption spending jumped 3.2% in the second quarter, helping keep economic growth from slowing further than it did, to a 1.5% annual pace from 2.1% in the prior quarter. Yet a Bank of America Institute analysis of July data found credit card spending excluding gas rose a solid 4.3%, with some evidence of "convergence" of spending rates across income groups and a lessening of the economy's K-shaped dynamics.

The debate over the K-shaped economy carries policy stakes. If lower-income households are increasingly reliant on credit to sustain spending, a further rise in delinquency could force lenders to tighten standards, weighing on consumption and complicating the Federal Reserve's path. Bessent's dismissal of the K-shaped economy contrasts with the New York Fed's own researchers, who point to the $1.26 trillion in credit card balances as evidence that many households still live paycheck to paycheck. For policymakers, the question is whether the aggregate resilience masks a growing strain that could surface in the next downturn.

This article is for informational purposes only and does not constitute investment advice.