Household, Credit Card Debt Continues to Soar
Despite high inflation, rising interest rates and a still-cloudy outlook on the fate of the U.S. economy, consumer spending has proven to be fairly resilient. In the July-September third quarter, consumer spending grew at an annualized rate of 4%, up from the 0.8% pace in the second quarter. In October, consumer spending rose an additional 0.7%. Over the past 12 months, consumer spending has risen 5.9%. But what’s behind this resiliency in consumer spending?
To offset the impact of high inflation and high interest rates, Americans have been taking on a massive load of debt. In its just-released Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of New York notes that total household debt in America reached a record-high $17.29 trillion in the third quarter. This is up 1.3% ($228 billion) from the second quarter and is up a whopping 22% since the end of 2019.
Within this household debt lies a record-high $1.08 trillion of credit card debt, up $48 billion (4.7%) from the second quarter. It’s also the second consecutive quarter that total credit card debt has breached the $1 trillion mark. Over the past 12 months, credit card balances have risen by $154 billion, the largest 12-month increase on record dating back to 1999.
The rise in credit card debt has triggered a rise in delinquencies. In the third quarter, an annualized 8% of all credit card balances transitioned into some form of delinquency. The sharpest rise in delinquencies was among borrowers aged 30-39.
As Americans load up on debt to fund their spending, one of the biggest challenges is rising interest rates. To help get inflation under control, the U.S. Federal Reserve has been aggressively raising interest rates. Since March 2022, the Fed has raised the benchmark fed funds rate from near-0% to its current level between 5.25%-5.5%. This has been the most aggressive pace of interest rate hikes by the Fed in more than 40 years. The fed funds rate serves as a basis for many forms of consumer debt. As the fed funds rate rises, so typically do rates on credit cards, bank loans, auto loans, HELOCs and home mortgages.
According to LendingTree, the average interest rate charged on a new credit card is 24.46%, a record high. October marked the twentieth consecutive month where rates on new credit cards have risen. According to the Consumer Financial Protection Board (CFPB), in 2022, consumers were charged a record-high $105 billion in interest on their credit card balances. Moreover, consumers were charged an additional $14.5 billion in late fees, up from 2021’s level of $11.3 billion.
As a result, the CFPB notes that one in 10 Americans find themselves in “persistent debt.” In other words, the interest and fees they are charged exceeds the amount of principal they are able to repay. Thus, their credit card balance each month continues to rise. This leads to runaway credit card balances consumers are unable to escape from, often resulting in default or bankruptcy.
The CFPB notes there are nearly 4,000 issuers, along with dozens of co-branded partners, that provide credit cards to nearly 190 million Americans – roughly 75% of the adult population. The average U.S. card holder owns three credit cards and makes 210 credit card purchases per year. On average, each American credit card holder carries about $5,300 in credit card debt. In total, Americans own a staggering 564.5 million active credit card accounts.
That’s a lot of credit cards. More importantly, that’s a lot of credit card debt. And as Wall Street has increasingly argued, this expansive reliance on credit card debt to fund consumer spending is simply not sustainable.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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