Affordability and the American Consumer

Affordability has become one of the defining economic debates entering this election season. Inflation appears to be cooling, but many families, particularly on the margins, still feel financial strain. As highlighted in my last quarterly note, the economy continues to show surprising resilience despite headwinds, driven largely by strong (though top-heavy) consumer spending and stable consumer debt performance. However, a closer look reveals a more nuanced picture of the consumer, often described as a K-shaped economy. For many households, higher costs on basic living essentials have made making ends meet harder than just a few years ago. Even as the broader economy shows resilience, affordability for many Americans remains uneven and fragile.

This tension is not new, and the underlying anxiety can feel remarkably familiar. Growing up in West Texas, I remember the booms and busts that plagued the era. Inflation had soared. The interest rate on my parents’ first home was closing in on 10 percent (though rates were as high as 18 percent). Gas prices were stubbornly high. Lines at the pump were long.

Thankfully, this is not then. Even still, when public frustration runs high, policymakers can be tempted to pursue “quick fix” solutions. But the lessons we learned in the late 1970s and 80s remain true today: “quick fixes” do not work unless they address the real sources of rising costs. If policymakers want to make real progress on affordability, they first must diagnose the problem correctly:

Where are Americans’ biggest expenses? What expenses are growing fastest?

Affordability, Big and Small: The drivers of today's affordability conversation.

To better understand the biggest expenses American families face today, CBA supported research by Dr. Alexei Alexandrov that examines the biggest and fastest growing expenses for American families over the last decade (2013- 2024).

Using Consumer Expenditure (CEX) Survey data supplemented by Personal Consumption Expenditures (PCE) data, Dr. Alexandrov finds that four major expense categories account for two-thirds of all expanded spending. (See Chart 1, below.)

For an average household, which earns approximately $104,207 a year (about $68,000 after taxes),their primary cost centers each month are:

• Healthcare ($6,197 per household, not including employer-related expenses),
• Shelter ($19,116 per household),
• Food ($10,163 per household), and
• Vehicles ($10,673 per household, excluding gas).

Housing

Housing is the single largest consumer-reported expense. Last fall, Goldman Sachs Research explained that “[a] prolonged slowdown in US housing supply has made it increasingly difficult to afford a home.” At the same time, elevated rates—between 6-7 percent over the past two years—have discouraged homeowners with lower-rate mortgages from selling, tightening supply

Renters face similar pressure. Pew Research found that half of households that rent are “rent burdened,” meaning that they spend more than 30% of their income on rent.

Healthcare

Healthcare costs continue to outpace wage growth, especially for working families and seniors. Even insured families face rising premiums, deductibles, and out-of-pocket expenses, making routine care a recurring affordability challenge, with disproportionate impacts on seniors and those with chronic conditions. 

Further, there are large, hidden costs. Dr. Alexandrov notes that healthcare expenses are primarily paid through employers and government. Once those expenditures are accounted for, “healthcare is both the single largest expense (at $24,418 combined per household in 2024), and the one that grew the most in absolute dollars over this period.” Dr. Alexandrov makes clear that while these employer-provided benefits may be less transparent to consumers, “consumers end up paying for it eventually – through lower income and through higher taxes.”

Vehicles

Vehicles are the second highest expense category according to Dr. Alexandrov’s research, encompassing purchases, loan and/or lease payments, maintenance, insurance, and any public transportation charges. It excludes gasoline, which is reported separately.

Food

Food costs make up the third highest category, and one of the fastest growing expense categories. According to the U.S. Department of Agriculture, during this same period (2014 – 2024), food prices increased between 30 percent for groceries and up nearly 50 percent for eating out.

Affordability, Big and Small: Where do interest and fees rank?

As policymakers search for “quick fixes” to affordability, recent debates have increasingly looked to credit card fees and interest. At first blush, that focus can seem compelling: the CFPB’s most recent CARD Act Report to Congress found that amid higher interest rates, more accounts, and larger balances, total credit card interest paid by consumers rose from roughly $100 billion in 2022 to about $160 billion in 2024. But large aggregate figures can obscure what matters most for everyday household budgets.

To put interest costs in context, Dr. Alexei Alexandrov incorporated the CFPB’s interest data into his broader analysis of household spending.

Chart 2, below, reflects that addition. It shows that while credit card interest is a real expense, the interest portion of consumers' credit card payments remain a relatively small slice of the overall affordability picture. In 2024, interest accounted for roughly $100 a month on average, a little over 1% of the average household budget

Because Things Get Lost in the Averages:  A closer look at the consumer impact.

Of course, averages tell only part of the story.

An average can describe the economy, but it does not describe a household. For families with limited savings, fixed incomes, or volatile hours, even modest increases in core expenses can eliminate what little cushion they have — regardless of what broader statistics imply. And let’s be clear: this isn’t an issue that’s limited to just low-income households or subprime consumers.

While over the past decade the costs of all items on the CPI rose by more than 34 percent and has been felt by all, households with appreciating assets, stable employment, and financial buffers have largely regained footing. Others — including renters, retirees on fixed incomes, and workers with more volatile earnings — have experienced rising essential costs without comparable gains in financial flexibility.

To understand how the rising costs of these essentials is felt at different income levels, Dr. Alexandrov breaks down these expense implications by income quintile. Not surprisingly, the bottom two income quintiles, which include middle income and lower income consumers, experience these expense increases more harshly as they have limited savings and face more income and expense volatility.   

Further, regardless of income, there are real-life differences in households that have significant financial impacts.

Childcare

Take childcare, for instance. The overall percentage of childcare expense for U.S. households looks relatively small—about $470 per month. However, not all adults have young children. And even among households that have young children, they may not pay anything for childcare (for example if grandparents live nearby).

According to the Federal Reserve’s Survey of Household Economic Decisionmaking, only 24 percent of parents of young children report paying for childcare. But for those that do, the cost is substantial. For just over half of those households paying for childcare, those costs were at least 50 percent of their overall housing costs.

Higher Education

For the over 12 million Americans with federal student loans in repayment, over a third are behind or delinquent. Federal student loans make up more than 90 percent of the student loan market, and largely due to a lack of market discipline and accountability, college tuition has increased more than 140 percent over the last two decades.

The pandemic made things worse. Borrowers who paused repayment, in some cases for years, have reentered repayment into a materially higher cost of living. Forgiveness proposals may offer temporary relief, but they don't address the underlying problem: tuition that keeps rising, borrowing that outpaces future earnings, and a system with little accountability for outcomes. The consequences show up elsewhere in household budgets — in delayed homeownership, postponed family formation, and reduced savings.

 As CBA's recent analysis shows, meaningful reform requires restoring the transparency and accountability to align borrowing with actual earning outcomes.

Revolvers vs. Transactors

We see this dynamic even within the credit card market itself. Roughly half of credit card accounts are “transactor” accounts, meaning balances are paid in full each month and no interest is incurred.

The other half are “revolvers,” carrying principal and paying interest. That means the “average” annual interest figure is effectively zero for one group — and roughly double for the other.

What’s happening to families outside of the averages?

To consider what happens when we move away from averages and focus on households that might get lost in the averages, let’s meet “Sara.”

Sara is in her thirties and earns a decent income. With her spouse, they earn the median household income of $68,572 (about $5,700 per month) after taxes in 2024. Sara has a “near prime” credit score.

Still, big chunks we discuss above (healthcare, shelter, vehicles, and food) eat up a lot of her monthly income:

• Shelter (rent or mortgage and other household costs) on average cost $1,500 a month;
• Vehicle expenses (including the cost of a lease or principal payments on a loan, insurance, and maintenance/repairs) cost $750 a month;
• Food is roughly $760 a month;
• Direct healthcare costs (not including premiums paid through payroll deductions) add up to $470 a month;
• And while Sara doesn’t have student loans, she does happen to have childcare costs – which total roughly $750 a month.

Including childcare, these expenses now make up about 75% of Sara’s household budget—this is before accounting for things like utilities ($380 a month), retirement savings ($480 a month), life insurance ($30 a month), clothes ($130 a month), gasoline ($220 a month), and other essential or recurring payments.

Now per the above, about half of consumers pay their credit card each month in full and pay zero in interest. The other half carries a balance (revolve) and pays interest. If Sara is among the 50 percent of households that carries debt on her credit card each month – the interest component of her credit card payment each month would be roughly $200 (double the average). 

Accounting for all these other major spending categories, a household like Sara’s has a “net savings” (after tax income minus expenses) of about $540 at the end of the year or about $45 per month, an incredibly thin margin when the cost of everyday essentials continues to increase and one unexpected expense can blow up a budget.

Shocks vs. Shock Absorbers

At first glance, $200 a month in interest sounds significant — about 3.5% of Sara’s annual after-tax income, but it is important to understand what that payment represents. Interest is not simply a penalty or a fee; it is the cost of accessing liquidity when income and expenses do not align.

In Sara’s case, it allows her to spread the cost of essential expenses over time rather than facing an immediate cash shortfall. That flexibility can be the difference between managing a temporary setback and falling into more severe financial distress.

Addressing affordability requires policies grounded in economic reality—policies that address the sources of affordability and rising prices—not policies that erode the systems of consumer stability and resiliency.

For a household like Sara’s, with only $45 in monthly breathing room, the ability to smooth a car repair, a medical bill, or a temporary reduction in hours can prevent far more disruptive consequences — missed rent, utility shutoffs, or costly alternative borrowing. In that sense, revolving credit functions less as a driver of affordability challenges and more as a short-term liquidity bridge. 

At first glance, it may seem as though once Sara begins revolving a balance, she is destined to pay that $200 a month indefinitely. But that perception does not reflect what the data show.  

While the CFPB’s most recent CARD Act Report found that more consumers made at least one minimum payment in 2024 than at any point in the prior decade — evidence that more families needed flexibility — that is only part of the story. The CFPB’s data also shows that consumers paid their balances in full at historic rates, the share paying less than 10 percent of their balances fell to historically low levels, and the share making meaningful progress paying down principal reached historically high levels. In other words: Households like Sara’s may use credit cards to absorb a temporary shock — but most do not remain stuck there. 

Credit cards and other bank liquidity services serve as a shock absorber. It is a liquidity bridge. It is a buffer between disruption and crisis. Expense shocks are not uncommon, and nearly 60 percent of American consumers experience at least one each year. When an unexpected car repair hits; when a medical bill arrives; when hours are cut; when the timing between paychecks and expenses doesn’t line up.

As CBA research has previously shown, credit cards were a critical source of financial stability during the COVID-19 pandemic, helping households maintain purchasing power amid historic disruption. That liquidity did not just support individual families; it helped sustain consumer spending at a pivotal moment as the broader economy worked to regain its footing. Today, card spending accounts for more than one-fifth of U.S. GDP. While balances have risen to $1.2 trillion, that growth largely reflects expanded access to credit, with most borrowers continuing to manage their debt responsibly.

Similarly, certain service fees are often tied to optional services like overdraft protection that provide convenience, immediacy, or protection against more severe consequences. 

Importantly, as Dr. Alexandrov explains, “Credit card fees – both annual and late, are so small as to barely register on the figure. I could have also added estimates of overdraft and NSF fees from Financial Health Network (FHN) for 2024, and they would be about as small as the credit card fees.”

A Path Forward

Just like in the late 1970s and early 1980s, affordability must be addressed at the sources. Price controls do not work to address affordability and only limit families’ access to the valued financial tools they rely on in times of need.  

Banks play an important role, but they cannot solve structural affordability challenges on their own. While we cannot prevent life’s income and expense disruptions from striking families like Sara’s, we innovate and diligently work to provide transparent products that compete to provide consumers with the best shock absorbers possible.  

For homeowners, tools like home equity lines of credit allow them to access accumulated equity when longer-term liquidity needs arise — whether to address unexpected expenses, bridge income gaps, or supplement retirement income. These options exist within a well-regulated framework designed to promote transparency and responsible underwriting. 

As Dr. Alexandrov notes, for households without access to home equity, credit cards remain the central mechanism for smoothing income and expense volatility. 

At the same time, despite meaningful progress in expanding access to credit, a material segment of Americans remain “credit invisible” or outside traditional underwriting models. For those households, deposit products — including overdraft services — can serve as short-term lifelines when income timing and essential expenses do not align. 

As we have this conversation on the cost pressures facing many Americans, let’s make sure we are solving for true sources of affordability, not weakening the very system that provides the products and services that help families weather them.