Americans paid 14% more for financial services last year: Report

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Americans paid 14% more for financial services last year, according to new research, driven by rising interest rates on loans, increased borrowing and, to a lesser extent, higher fees on deposit accounts.

Consumers spent $347 billion on interest and fees in 2022, up from $304 billion the previous year, according to a report from Financial Health Network, a nonprofit organization that focuses on improving Americans' financial outcomes.

Spending on credit and loan products — excluding mortgages, which were not covered in the report — rose by 15%.

"Altogether, this paints a picture of debt that could really start to strain the checkbooks of American families," said Meghan Greene, senior director of policy and research at Financial Health Network. "Toward the end of 2022, there were a number of signs that defaults were starting to grow, so that gives us a worrisome picture of how much debt people are carrying."

The signs of weakening consumer credit have continued into 2023. Delinquencies on credit cards and auto loans have reached or surpassed their pre-pandemic levels in recent months — a sign that Americans are losing the financial cushion they have enjoyed for the past few years. The return to pre-pandemic credit quality also indicates that consumers are paying their debts at a more typical pace, compared with the quick rates they had maintained until recently.

Starting in 2020 and continuing through much of 2022, consumer credit quality was strong thanks to pandemic-era measures that helped customers keep up with their loan payments, including lenient payment time frames and government stimulus payments.

But the Financial Health Network report highlights factors that are now stretching consumers' wallets. Last year, total fees and interest on credit cards rose 20% from 2021 to $113.1 billion, according to the report.

Higher interest rates drove about one-quarter of the increase, while elevated card balances accounted for the rest, according to estimates by the report's authors.

The findings align with other recent data that show consumers loading up their credit cards at the fastest year-over-year pace on record. Credit card balances totaled $1 trillion at the end of March, a 17% increase from a year earlier, according to the Federal Reserve Bank of New York.

The U.S. personal savings rate, which spiked during the pandemic, fell to historical lows last year and has only slightly increased so far this year.

The Financial Health Network found that consumers who financed used-car purchases paid about 18% more in interest and fees last year, while those who borrowed to buy new cars saw their overall costs increase by 7%.

Out of 13 credit and loan products, 11 showed increases in total fees and interest in 2022, according to the report. Spending on unsecured installment loans and pawn loans jumped 25%. 

The Federal Reserve hiked interest rates seven times in 2022, ending the year between 4.25 and 4.5%. The faster-than-expected increase in rates took businesses and consumers alike by surprise, leading to higher rates on products from credit cards to student loans.

Rise in consumer loan delinquencies signals end of pandemic trend

U.S. consumers also paid 4% more last year on services related to transactions and deposits, according to the Financial Health Network report. The biggest increases came in account maintenance fees, which rose by 16%, and charges for international remittances, which climbed by 10%.

Spending related to transactions and deposits rose despite a decline in what has historically been one of the industry's most lucrative fee categories — overdraft-related fees.

Revenue from overdraft and nonsufficient funds fees fell by 6% to $9.9 billion, down from $10.6 billion in 2021 and an estimated $15.5 billion before the COVID-19 pandemic. Many large banks made their overdraft policies more consumer-friendly last year in the face of regulatory pressure and competition from neobanks.

But the declines in overdraft revenue weren't uniform across the industry.

Banks with at least $1 billion of assets reported a 13% decline in revenue from overdraft and nonsufficient funds fees, according to a Financial Health Network analysis of call reports. Meanwhile, at banks with less than $1 billion of assets, overdraft revenue increased slightly between 2021 and 2022.

The cost and logistical challenges associated with overhauling the systems that execute overdraft policies are holding many smaller banks back from doing so, said Hank Israel, managing director of behavioral insights at Curinos, a financial services consulting firm. He also pointed to rising interest rates, which have put pressure on banks' margins, as a factor that may have stopped smaller banks from reducing overdraft fees.

"They don't have the same ability to manage pricing on deposits as rates rise, and so they're kind of a little squeezed in order to try and address this challenge," Israel said.

Although overdraft fees may be smaller and charged less frequently, the same share of households reported paying them last year, 17%, as in 2021, according to the report.

Banks are still tweaking their overdraft policies. Regions Financial, which regulators fined as recently as last year for overdraft violations, said last week that it will give customers an extra day to avoid overdraft charges.