Credit Sesame examines how consumer spending habits are shifting dangerously, with more Americans relying on debt instead of financial stability.
Rising incomes have outpaced inflation for more than two years, creating a prime opportunity for households to reduce debt and build savings. Yet, many consumers have chosen to increase their spending instead of taking advantage of this financial cushion. This growing reliance on borrowed money signals a troubling trend that could have serious financial consequences for consumers if it continues.
Spending growth outpaced inflation and income growth in Q4
At the end of January 2025, the Bureau of Economic Advisors announced that personal income growth had exceeded inflation by 2.4% in 2024. That good news was dampened by the fact that consumer spending growth had exceeded income growth. Consumer spending increased by 3.1% after adjustment for inflation.
Since spending grew faster than inflation, price increases don’t account for the rising expenditure. This is part of a continuing trend. Consumer spending has grown faster than income growth in six of the last eight calendar quarters. It has grown faster than inflation in every quarter since mid-2020.
Consumers lean on debt to sustain spending
How are consumers maintaining this rapid pace of spending? Many of them are borrowing to sustain their growing appetite for buying.
Revolving debt, most of which is credit card borrowing, has grown by over $400 billion since the end of 2020. With the average interest rate charged on credit card balances over 22%, this debt is expensive to maintain.
This creates a worsening cycle of debt. Those high-interest charges eat further into household budgets, forcing more borrowing and pushing consumers into an ever-deepening hole.
Overspending can also take a toll on savings
Even consumers who can avoid the debt trap may find their savings suffer due to overspending.
Over the last 50 years, Americans have saved an average of 7.4% of their yearly disposable income. Last year, this figure was just 4.7%. This is nothing new. For the most part, savings rates have been subpar since the mid-1990s.
This chronic under-saving means fewer Americans are building wealth over time. Many will find they don’t have enough saved for a comfortable retirement. In the meantime, a lack of savings leaves them more exposed to financial emergencies. Without a savings cushion, a financial setback could quickly push them into debt.
Credit score damage raises the cost
In addition to the direct costs of debt payments and interest charges, there is another price to pay for overspending.
Carrying large balances can hurt your credit score. Even worse is the impact of late payments.
According to the Federal Reserve Bank of New York, the percentage of credit card debt with payments that are 90 days or more overdue has risen sharply over the past three years and is now at its highest level in over a dozen years.
Since payment history is the biggest single factor in determining credit scores, the rising percentage of overdue accounts is damaging those scores. People with lower credit scores generally have to pay more to use credit. Add late fees incurred by missing payments, and it is easy to understand how the debt feeds on itself.
Getting your spending in line
Since the root cause of this cycle of debt is overspending, the solution comes down to getting spending in line. Here are some suggestions:
- Track your spending. Keeping track of what you spend your money on is easier now that people use cash less often. Not only do debit and credit cards create a transaction record, but with online access, you don’t even have to wait for your next statement to view those transactions. Being more aware of how you’re spending your money can help you adjust your habits.
- Look for easy cuts. Once you’ve gotten a feel for what you’re spending money on, look for areas to make easy cuts. There are bound to be some transactions that stand out to you as things you could have done without. Pick the easy targets first, and see how much this could save you.
- Separate spending into discretionary and non-discretionary categories. If those easy targets don’t yield enough savings, separate your spending into discretionary and non-discretionary categories. Non-discretionary spending represents expenses you must pay–housing costs, utility bills, and groceries, for example. Discretionary spending includes things that are wants rather than needs.
- Cut your spending budget. Reining in spending should start with discretionary spending.
- Try zero-based budgeting. If you’re struggling to decide what to cut, zero-based budgeting offers a fresh start. Instead of assuming your current spending will continue, you allocate money only for essentials first. Once necessities are covered, prioritize debt repayment and savings. Only after those financial goals are met should any remaining income go toward discretionary spending. This approach helps ensure your money works for you—not against you.
Breaking free from unhealthy consumer spending habits requires a conscious effort to rein in unnecessary expenses and avoid the debt trap. The sooner you take control of your budget, the better positioned you’ll be for long-term financial stability. Small changes today can help prevent major financial struggles in the future.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice
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