1 in 7 Gen Z credit card users are ‘maxed out’

Ariel Barnes plunged into a credit card debt spiral in college, and a decade later she’s yet to escape.

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 high that it’s hard to get out of it,” Barnes, who is 28 years old and lives in Jackson, Mississippi, told CNN in a phone interview on Thursday.

Barnes is hardly alone.

Roughly one in seven (15.3%) Gen Z credit card borrowers have maxed out their credit cards, according to new research from the Federal Reserve Bank of New York. (The NY Fed defined Gen Z as borrowers born between 1995 and 2011, though others mark the cut off as 1996 or 1997).

By comparison, just 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 severely tight cash-flow problem.

The findings underscore starkly different conditions masked by national economic statistics.

Barnes blames bad financial decisions when she was in college for her current situation, which has forced her to live at home and delay major life events.

“I want children. The clock is ticking. But I can’t afford to have any children,” she said. “I’ve had to go to therapy because it is a lot mentally.”

More and more Americans of all ages are falling behind on their bills — especially credit card bills. The NY Fed found that for all debt outside of student loans, delinquency rates have been steadily rising since tumbling to historic lows during the Covid-19 pandemic.

Credit card delinquencies have surpassed pre-pandemic levels and continue to rise. Severe credit card delinquencies, those 90 days overdue, have now climbed to 10.7% — the highest since 2012.

The findings show how pockets of financial stress continue to emerge in the US economy following three years of high inflation.

“It is worrisome that so many Gen Zers are falling behind,” said Ted Rossman, senior industry analyst at Bankrate.com. ”We’re seeing more people financing daily essentials such as groceries and gas, and this can be a tough cycle to break.”

‘Cause for concern’

Even as stocks on Wall Street hit historic highs and unemployment remains unusually low, millions of Americans are struggling with the cost of living.

“The rise in severe delinquencies — those over 90 days overdue — is a cause for concern,” said Gregory Daco, chief economist at EY.

The NY Fed found there is a direct link between maxing out credit cards and falling behind on payments.

Very few Americans who have used 20% or less of their credit card limit have fallen behind on their bills, according to the research.

However, the transition rate into delinquency for those who have used more than 60% of their credit card limit has now surpassed pre-Covid levels and continues to rise, the NY Fed said.

A third of maxed-out borrowers are delinquent

The researchers said this trend is “especially remarkable” for those who have maxed out their cards, defined as using 90% to 100% of their limit.

A third of maxed-out borrowers have gone delinquent in the last year, compared with less than a quarter before the pandemic, the NY Fed said.

“While most commentators discuss a soft landing for the economy or the consumer,” Daco said, “the latest evidence on credit conditions points to multiple economies, multiple consumers, affected to different degrees by the higher cost and higher interest rate environment.”

Maxing out credit cards can hurt borrowers’ credit scores. Under FICO Score’s calculation, the ratio of balance-to-credit limit is the second most important category for determining credit scores.

“FICO will be closely monitoring this trend in the coming quarters to better understand whether this is simply a reversion to pre-pandemic consumer behaviors,” Tommy Lee, senior director at FICO, told CNN in an email.

The NY Fed explained that part of the reason Gen Z borrowers are maxed out is because they have much lower credit limits. Many younger Americans haven’t had the time to build credit histories and credit scores that would let them borrow more.

For instance, the median Gen Z borrower’s credit limit is just $4,500, compared with $16,300 for Millennials and $21,800 for Gen X, the NY Fed said.

The NY Fed declined to share historical data on maxed out credit cards by generation.

During a call with reporters, NY Fed researchers explained that it’s a “typical age pattern” where younger borrowers have used up more of their credit card limit.

Lee, the FICO executive, said history shows that as consumers age and their credit experience increases, so do their credit limits.

Americans in low-income areas are more likely to be maxed out

Of course, it’s not just younger users maxing out their credit cards.

The NY Fed found that borrowers who live in low-income areas are also more likely to be maxed out.

About 12% of borrowers living in neighborhoods with the bottom 25% of incomes have maxed out their cards, the report found. That’s more than twice the 5.5% of borrowers living in the highest income neighborhoods who are maxed out.

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 stands at 20.66%, according to Bankrate. That’s just shy of the record high of 20.75% set last month.

Daco said officials at the Federal Reserve must take into account the credit card stress some Americans are feeling as they decide when to lower interest rates.

The Fed faces a delicate balance.

Cutting rates prematurely could make inflation worse. But waiting too long could pile even more pressure on borrowers, especially if the jobs market slows and more people struggle to find work.

“The risk of over-tightening could lead to unintended consequences that further strain household finances,” Daco said.

Ways to get out of debt

Experts say there are possible solutions for people who feel trapped by credit card debt.

Rossman, the Bankrate analyst, said options include:

“I know it’s easier said than done,” Rossman said, “but it’s so important to make credit card debt payoff a priority.”

CNN’s Alicia Wallace contributed reporting.

Update: A previous version of this story included employment information of an interviewee. Upon her request, and out of concern for her employment, CNN removed that information.