What do you get when you combine soaring credit card balances with rapidly rising rates?
Nothing good, probably. We’re about to find out.
The latest installment of the NY Fed’s quarterly household debt report, released on Tuesday, showed that credit card debt rose $38 billion in Q3 (figure below), the fourth-most ever, behind Q2, Q4 of 2021 and Q4 of 2019, on the eve of the pandemic.
The headline-friendly version says credit card balances rose the most in two decades, which is true when you measure the YoY increase. Balances were 15% higher in Q3 versus the same period last year, which makes sense in the context of 2022’s inflation realities.
I’m not sure this is a perfect comparison, but I’d be remiss not to mention that the rate of growth for card balances is almost twice headline CPI. The New York Fed made the same observation.
“With prices more than 8% higher than they were a year ago, it is perhaps unsurprising that balances are increasing,” Andrew Haughwout, among other researchers, wrote Tuesday, before calling it “notable” that card balances “have grown at nearly double that rate since last year.”
For what it’s worth, if you take the annual growth rate of Americans’ card balances and subtract the average quarterly rate of headline consumer price growth, you’re left with the widest disparity since at least 2004 (figure below).
I don’t want to make too much of that, other than what may or may not be obvious from the chart. I present it as is, with no pretensions to analytical profundity.
Fed researchers did provide a bit in the way of color on the demographic breakdown of card balances and how they’ve evolved since the onset of the pandemic. Perhaps not surprisingly, older borrowers’ average balances are still below Q4 2019 levels, while those for 18-29 year olds now exceed pre-pandemic levels. Delinquency rates are still low, but have inflected higher, except for high-income borrowers,
The figure (below) shows the number of open accounts in America — nearly two for every man, woman and child.
There’s plenty of headroom on those cards, by the way. Or at least for now. Available credit stood at $3.33 trillion at the end of last quarter.
It’s tempting to say something trite or ostensibly witty about this being unsustainable or a recipe for disaster, and so on. And maybe it is — a recipe for disaster, I mean. But maybe it’ll all be ok. The truth is that if it’s perilous enough to have an impact on the broad economy that’s observable from the 30,000-foot level, we likely won’t know until it’s too late.
In the meantime, I suppose all we can do is note that the average APR on credit cards now exceeds 19%, according to Bankrate. The trajectory is — how should I put this? — challenging (figure below).
The national average was 16.3% at the beginning of the year. It was 19.04% as of November 9, the highest on record.
“It’s all about the Fed,” Bankrate said this month. “While the average rate on new credit card offers has increased by 274bps since January 1, most cardholders will soon be charged rates that are 375bps higher than they were at the start of the year, matching the Fed’s moves.”
Writing Tuesday, the New York Fed summed it up. “The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards.”
Those guys… they really get it.
There’s another debt bomb coming due that I haven’t seen anyone talking about: student loans. Nearly $2 trillion in student loans have been in a repayment moratorium for over 2 and a half years. That all comes to an end January 1. People with the highest marginal propensity to consume haven’t had to make a loan payment for nearly 3 years. (And I have to imagine there’s a big overlap with the people racking up credit card debt). All that comes crashing to a halt in a month and a half. Q1 is going to see a consumption collapse.
In other news, Biden’s student loan forgiveness has been struck down by the courts, and it appears unlikely to be resurrected on appeal.
There are a lot of headwinds to consumer spending next year once extra pandemic savings get depleted
RIA how will we know when pandemic savings get depleted? I mean are we talking about the relatively tiny stimulus handouts? If people “consumers” are living pay check to pay check, that part of pandemic savings was spent several dozen pay checks ago.
Look at the checkable deposits chart. Last I looked q3 isn’t out yet.
Thank you!
That is a dramatic rise, it seems the bottom levels of the 1-50 really are at a pay check to pay check or below level for this data to show such an increase.
The poorest money is probably gone, the thrifty of the bottom 1-50 only lose through budget attrition, the upper levels have not wanted to or have not had to spend it. Will follow this.