Americans now have a record $14 trillion in debt

US households are now sitting on a record $14 trillion in mortgages, credit cards, student loans and other forms of debt.

Household debt ticked up 0.7% during the third quarter, the New York Federal Reserve said on Wednesday, continuing a five-year climb encouraged by low unemployment, strong consumer confidence and cheap borrowing costs.

Consumer debt is now about $1.3 trillion higher than the previous peak set in 2008, although these figures are not adjusted for inflation nor the larger size of today’s economy. Household debt has climbed about 25% from the post-recession low of $12.7 trillion.

Mortgages remains the largest chunk of Americans’ debt, accounting for $9.44 trillion. That’s up by $31 billion, or 0.3%, from the end of the second quarter, according to the NY Fed.

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Student loans climbed by 1.4% to $1.5 trillion, while credit card balances rose $13 billion during the third quarter.

All of that borrowing, particularly credit cards and mortgages, support consumer spending – the biggest part of the US modern economy. But that debt will also become harder to repay during the next recession when unemployment rises.

Federal Reserve Chairman Jerome Powell warned Wednesday that business debt is “historically high,” but signaled he’s not particularly concerned about consumer borrowing.

“The ratio of household borrowing to income is low relative to its pre-crisis level and has been gradually declining in recent years,” Powell told lawmakers on Capitol Hill.

However, Peter Boockvar, chief investment officer at Bleakley Advisory Group, questioned in a note to clients Wednesday whether the mid-2000s, a period marked by an historic housing bubble, is the best reference point. Boockvar noted that household debt relative to income remains “way above” the levels of the 1980s and 1990s.

Still, the US economy is much larger than it was during previous decades, meaning it can likely handle a higher amount of debt.

The ratio of household debt-to-GDP stood at 76% during the second quarter, according to the St. Louis Federal Reserve. That’s well below the recent peak of nearly 100% in 2009.

Easy money will encourage more borrowing

Borrowing costs have tumbled in recent months because the Fed has slashed interest rates three meetings in a row to fight the economic slowdown at home and abroad. Those rate cuts make it cheaper for households and businesses to borrow and refinance existing debt. That easy money may ultimately help drive US debt even higher.

“The data suggest that households are taking advantage of a low-interest rate environment to secure credit,” Donghoon Lee, research officer at the New York Fed, said in a statement.

Boockvar said that listening to Powell talk about rising US private debt is “like hearing a bartender who has handed out drinks all night and then asking why everyone is drunk at the end of the party.”

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The good news is that fewer Americans are filing for bankruptcy.

About 186,000 consumers had a bankruptcy notation added to their credit report during the third quarter, compared with 215,000 during the same period of 2018, the NY Fed said.

However, despite historically-low unemployment, the NY Fed said that delinquency rates worsened. About 4.8% of outstanding debt was delinquent at the end of the third quarter, up from 4.4% at the end of the second quarter. About $667 billion of debt is delinquent, including $424 billion that is seriously delinquent, a category that includes debt that is at least 90 days late.

$1.5 trillion of student debt

Student debt continues to be a sore spot.

About 11% of the $1.5 trillion of US student debt was more than 90 days delinquent or in default, according to the NY Fed. That’s the most for any loan type and is nearly double 2004 levels, the earliest year the report covers.

Research shows that race may be playing a role.

Default rates in black-majority zip codes are double those in white-majority zip codes, NY Fed economists found. They said that these “repayment struggles” point to the importance of income differences across borrowers in different areas.

Credit card rates recently hit 17%, the highest level in at least 25 years, making this an especially costly form of borrowing. Part of that rise has been driven by fierce competition to lure borrowers with flashy rewards.

“The rewards have gotten richer and richer. That’s why you’re seeing a trade-off in rates,” Margaret Keane, the CEO of Synchrony Financial (SYF), told CNN Business. “Consumers don’t always look at the rates, to be frank.”