Inflation in the United States is posing severe financial challenges for Americans, resulting in a surge in defaults on credit cards and auto loans.

The relentless rise in inflation is taking a toll on Americans, particularly those with lower and middle incomes. Despite the Federal Reserve’s efforts to combat inflation, essential expenses such as rent, groceries, and the cost of both new and used cars continue to soar.

Credit agency Equifax reports that credit card delinquencies have surged to 3.8%, with a default rate of 3.6% on auto loans. These figures mark the highest levels witnessed in over ten years.

Many individuals, having exhausted their savings from government stimulus checks issued during the pandemic, are resorting to opening new lines of credit. This trend persists despite the fact that the average interest rate on credit cards has reached an unprecedented 20.6%, according to Bankrate.com.

$1 trillion debt

Since the pre-pandemic year of 2019, the number of open credit card accounts has surged by a staggering 70 million. This surge in borrowing has pushed the total credit card debt in the nation past the historic milestone of $1 trillion.

The Federal Reserve is contemplating raising interest rates to combat inflation, aiming to bring it down from its current level of 3.5% to the target rate of 2%. If these hikes occur, it could lead to even higher interest rates on credit cards, exacerbating borrowers’ financial difficulties.

As the moratorium on student loans, in place for more than three years, comes to an end, individuals already grappling with high rent and grocery costs will face the added burden of student loan payments starting next month.

While the Federal Reserve views these challenges as a rationale for raising interest rates to limit consumer spending, there are apprehensions that consumers may accumulate more debt during the holiday season, further compounding their financial woes.

Retail giants like Macy’s and Kohl’s have reported an uptick in delinquency rates among customers who hold private label store cards, underscoring the financial stress experienced by consumers.