America’s addiction to credit has reached historic proportions at a time when the cost of debt is rising at the fastest pace in history. That doesn't bode well for the economy, say experts

According to veteran economist Carl Weinberg, the rising cost of debt will inevitably lead consumers to cut back on their spending habits and send the economy into a spiral.

“Consumers are just waking up to the fact that they're financing their spending by running up their credit cards, and that the interest on those credit cards is over the top, out of control, off the hook right now,” Weinberg told CNBC.

Consumer spending is the bedrock of the U.S. economy, accounting for nearly 70% of GDP. Cracks in that foundation can be seen when consumers’ purchasing habits change or decline.

Although Weinberg doesn’t expect a full-blown recession, he said the chances are high “that consumers get into trouble” as soon as next year.

Economists from JPMorgan and Citadel, as well as billionaire bond investors Jeffrey Gundlach and Bill Gross, are similarly worried about the consumer credit bubble.

A house of cards built on credit

According to Creditnews Research, Americans today hold the highest share of non-housing debt to total debt on record. Credit cards are among the biggest contributors—with balances cresting over $1 trillion in the third quarter of this year.

Not only that, the average interest rate on these cards has grown a draconian 50% over the past few years alone, nearly doubling the average rate of the last decade.

According to the latest available data, average credit card interest rates are 21.19%, the highest on record.

Americans pay even higher interest rates on retail credit cards—the kind you get at specific stores like Macy’s or Target. Some retailers charge more than 30% interest.

Expensive credit card debt is already taking a toll on Americans.

Creditnews Research estimated that 2% of new credit card borrowers in the third quarter were in delinquency, or more than 30 days behind on their payments. That’s the highest level since pre-Covid.

It’s not just new borrowers who are falling behind. In October, the average delinquency rate for the top five credit card issuers increased by 0.16 percentage point, according to Fed data.

While that doesn’t seem like much, these issuers reported a massive spike in net charge-offs—the amount of debt they think they’ll never collect because of delinquency or default.

Consumer spending slows

There’s already evidence that record debt levels are beginning to take a bite out of consumer spending.

Retail sales—one of the most closely-watched indicators of consumer spending—declined by 0.2% in October. That was the first drop since March.

Meanwhile, retailers warn of a “discretionary recession” as consumers reduce their spending on non-essential items or buy cheaper alternatives.

During Target’s third-quarter earnings call, chief financial growth officer Christina Hennington said: “Consumers are feeling the weight of multiple economic pressures, and discretionary retail has borne the brunt of this weight.”

Consumer confidence is also wavering because of higher interest rates and tighter household budgets.

According to Joanne Hsu, the director of the University of Michigan consumer sentiment survey, “The combination of expectations for persistently high prices, high borrowing costs, and labor market weakness does not bode well for the prospect of continued strength in consumer spending and economic growth.”