Credit cards are primarily a payment method, paid monthly. The importance of borrowings has diminished over the years.
By Wolf Richter for WOLF STREET.
Credit card balances include balances that accrue interest and balances that are paid in full by the due date such that no interest accrues. Many Americans use credit cards only as a method of payment (and to get the 1.5% cash back or whatever), not as a method of borrowing. Thus, credit card balances are much more a measure of spending than borrowing.
Fitch estimated that the total amount paid with credit cards in the United States reached $4.6 trillion in 2021. Only a tiny fraction of the expenses were not fully repaid and added to the debt carrying interest.
In the third quarter, credit card balances rose $38 billion from the previous quarter to $930 billion, according to the New York Fed. Household debt and credit report. This $930 billion includes transactions initiated roughly in September but fully repaid in October, which do not generate interest.
Credit card spending has been boosted by the resurgence in travel, with credit cards being used as a method of payment for hotels, airline tickets, rental cars, meals, and more. Soaring costs are further increasing the amounts that pass through credit cards. But cardholders fully refunded almost all of the new amounts paid by credit card during the quarter.
Households have a lot of debt, but the problem isn’t credit cards, it’s mortgages.
In a moment, we’ll look at credit card balances as a percentage of total consumer debt and as a percentage of disposable income, and we’ll look at delinquencies and third-party collections, and we’ll see that the burden of revolving credit is not more than a small fraction of what it was in previous years and decades, and delinquencies have started to rise, but are still below pre-pandemic lows, and third-party collections have dropped to new records.
During the pandemic, plummeting reservations for airline tickets, hotels, entertainment and sports venues, restaurant meals, etc., have led to a drop in the use of credit cards as payment , and that’s where the big dip happened; it shows the collapse of expenditure on services. It is now back to normal as service spending recovers.
And yet, outstanding credit card balances in the third quarter increased by only $43 billion, showing the universal use of credit cards as a method of payment, with balances paid in full each month, and in the extent to which credit cards are used as a method of borrowing. And that makes sense because borrowing with a credit card can be ridiculously expensive, with rates as high as 30%, but paying with a credit card can earn you a kickback.
“Other” consumer loans, such as personal loans, payday loans and Buy-Now-Pay-Later (BNPL) loans, increased by $21 billion, reaching $490 billion in the third quarter . Most of them bear interest, but not all of them: for example, BNPL loans can be subsidized by the trader. These loan balances are now back to their 2003 level, despite 19 years of population growth, rising incomes and runaway inflation.
What is amazing, in fact, is how down these balances are after 20 years of population growth, income growth and inflation:
Decrease in the amount of credit card debt.
Consumers have reduced their reliance on credit card debt over the years, although credit cards have largely replaced checks and cash as payment methods. In 2021, $4.6 trillion was spent on credit cards, yet over the same period credit card balances grew by only $40 billion.
In 2003, credit card balances and other loans combined (the red and green lines in the chart above) accounted for more than 16% of total consumer debt, which also includes mortgages, auto loans and student loans. During the pandemic, this figure fell to 8%. In the third quarter, credit card balances and other consumer debt reached 8.6% of total consumer debt, roughly within the range of the pre-pandemic low in 2014.
Debt burden as a percentage of disposable income.
In 2003, credit card balances and “other” consumer debt accounted for 14% of disposable income (income from all sources minus taxes and social contributions). And then over the years it fell steadily as the burden of credit card balances and “other” consumer loan balances fell relative to disposable income. In the first quarter of 2021, it fell to an all-time low of 6% as disposable income ballooned with stimulus funds. In Q3 2022, it rose to 7.6%, roughly within the range of pre-pandemic lows:
Delinquencies increase, remain at or below pre-pandemic lows.
Stimulus funds delivered directly to consumers during the pandemic – stimulus checks, PPP loans, additional unemployment benefits, etc. – as well as the sums that consumers did not have to pay – mortgage forbearance, bans on eviction, etc. dough, and many who had fallen behind on their credit cards have caught up. Others were able to enter their credit card arrears into forbearance programs, and the outstanding balance was marked “current”.
That’s all over, and credit card balances that are becoming unpaid — 30+ days past due — have been growing all year. In the third quarter, they reached 5.2% of total balances, which is in the same range as during the pre-pandemic lows of early 2016.
“Other” consumer loans, such as personal loans, that are becoming delinquent reached 5.8% of total “other” balances and remain well below pre-pandemic lows:
Third-party collections fell to new all-time lows.
The percentage of consumers with third-party collections fell to 5.7%, the lowest on record, and down from 14.6% of all consumers following the unemployment crisis of the Great Recession.
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