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Credit cards are mostly a payment method that is paid monthly. The importance of borrowing has diminished over the years.

Through Wolf Richter to the WOLF ROAD.

Credit card balances include balances that earn interest and balances that are paid in full on the due date, so no interest accrues. Many Americans only use credit cards as a method of payment (and to get the 1.5% cash back or whatever) and not as a method of borrowing. So credit card balances are much more a measure of spending than borrowing.

Fitch estimated that the total amount paid with credit cards in the US would reach $4.6 trillion in 2021. Only a tiny amount of the expense was not repaid in full and was added to the interest-bearing debt.

In the third quarter, credit card balances rose $38 billion sequentially to $930 billion, according to the New York Fed Household debt and credit report. That $930 billion includes transactions made around September but paid out in full in October and accruing no interest.

Credit card spending has been boosted by the resurgence of travel, with credit cards being used as a method of payment for hotels, airline tickets, car rentals, meals, and so on. Rising costs continue to drive up the amounts flowing through credit cards. However, cardholders paid back almost all new amounts paid by credit card in the quarter in full.

Households have a lot of debt, but the problem isn’t credit cards, it’s mortgages.

In a moment, we’re going to look at credit card balances as a percentage of total consumer debt and as a percentage of disposable income, and we’re going to look at arrears and third-party collections, and we’re going to look at the burden of revolving credit today, just a tiny fraction of what it is in previous years and decades, and that arrears have started to rise but are still below pre-pandemic lows, and that third-party collections have fallen to new record lows.

During the pandemic, the slump in bookings for airline tickets, hotels, entertainment and sports venues, restaurant meals, etc. led to the decline in the use of credit cards as a payment method, and that’s where the big bottom occurred; it shows the collapse in spending on services. This is now returning to normal as service spending recovers.

And yet, outstanding credit card balances grew by just $43 billion in the third quarter, demonstrating the ubiquitous use of credit cards as a payment method, with balances being paid in full each month, and the small scale use of credit cards as a borrowing method. And that makes sense, because borrowing with a credit card can be ridiculously expensive with interest rates up to 30%, but paying with a credit card can give you a kickback.

“Other” consumer lending, such as personal loans, payday loans, and pay-now-later (BNPL) loans, grew $21 billion to $490 billion in the third quarter. Most of them are interest-bearing, but not all: for example, BNPL loans may be subsidized by the retailer. These loan balances are now back to where they were in 2003, despite 19 years of population growth, income growth and rampant inflation.

It’s actually amazing how low After 20 years, these balance sheets are population growth, income growth and inflation:

Declining Importance 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, and yet credit card balances only grew by $40 billion over the same period.

In 2003, credit card balances and other loans combined (the red and green lines in the chart above) accounted for over 16% of total consumer debt, which also includes mortgages, auto loans, and student loans. During the pandemic, this dropped to 8%. In the third quarter, credit card balances and other consumer debt rose to 8.6% of total consumer debt, roughly in line with the pre-pandemic low of 2014.

Debt burden as a percentage of disposable income.

Credit card balances and “other” consumer debt together accounted for 14% of disposable income (income from all sources less taxes and social security contributions) in 2003. And then it steadily declined over the years as the drain on credit card balances and “other” consumer loan balances relative to disposable income decreased. It fell to an all-time low of 6% in the first quarter of 2021 as disposable income exploded with stimulus funds. In Q3 2022, it rose to 7.6%, roughly in line with pre-pandemic lows:

Arrears are rising, staying at or below pre-pandemic lows.

The stimulus monies paid directly to consumers during the pandemic — stimulus checks, PPP loans, extra unemployment benefits, and so on — plus the monies consumers didn’t have to pay — mortgage forbearance, eviction bans, etc. — left consumers some leftover dough, and many of those who had fallen behind with their credit cards were catching up. Others were able to enter their credit card arrears into forbearance programs and the arrears were marked as “current.”

All of that is over, and credit card balances going into default — 30 days or more overdue — have been rising year-round. In the third quarter, they rose to 5.2% of total balances, which is in the same range as during the pre-pandemic lows of early 2016.

“Other” consumer credit, such as B. Personal loans defaulting rose to 5.8% of total “other” balances and remain well below pre-pandemic lows:

Third-party collections fell to new historic lows.

The percentage of consumers with third-party collections fell to 5.7%, the lowest on record, and from 14.6% of all consumers after the unemployment crisis during the Great Recession.

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