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One analyst’s estimate this week that “real” debt could be nearly 2000 percent of GDP attracted plenty of attention, but analysts who study consumer spending habits say there’s a real debt risk much closer to home: The amount and pace at which American consumers are racking up credit card debt.
“As far as American's finances are concerned, the current situation is not too encouraging,” said Jill Gonzalez, senior analyst at personal finance platform WalletHub. “We started the year owing more than $1 trillion in credit card debt, and although we paid off a large chunk in the first quarter, that could be a sign that more debt will be taken on by consumers."
According to the Federal Reserve’s consumer credit tracker, revolving credit — a category in which credit card debt predominates — increased at an annualized rate of 11.25 percent in July, the most recent month for which data is available.
“In terms of revolving debt, we see spikes like this every so often, but they don’t jump by double digits all that much,” said Matt Schulz, chief industry analyst at CompareCards. Typically, big jumps occur around the holidays, though — not in July.
“Credit card debt can be read a couple of different ways. It can be read as a sign of confidence that people are feeling good and be willing to spend, or it can be seen that more and more people are needing to rely on credit cards to get by or make ends meet. Given some other signs that we’ve seen of Americans’ confidence in their finances at the moment, I think this is a sign that things are getting a little bit tougher for folks,” Schulz said.
According to Fed data, borrowers hit the trillion-dollar mark in outstanding revolving credit back in September 2017 for the first time since January 2009. The total amount of revolving credit peaked in May 2008 at roughly $1.02 trillion. WalletHub’s Gonzalez estimated that net consumer credit card debt will increase by $70 billion this year. Currently delinquencies and defaults are still at low levels overall, but for how long this will be sustainable is an open question, particularly for subprime borrowers.
“It’s always concerning when you see so much of an increase in high interest rate debt, and revolving credit card debt right now is something that would fit that category,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling.
“Both revolving and non-revolving debt have been growing at a faster pace than household income for years,” said Greg McBride, chief financial analyst at Bankrate. “We haven’t seen signs of stress because unemployment is really low and so are interest rates, but as soon as either one of those or both increase in any measurable way, that’s when the cracks will start to appear,” he said. “All this debt is not a problem until it is.”
In recent months, uncertainty over the President Donald Trump’s trade policies has prompted a sharp pullback in corporate investment, leaving consumer spending as the last big driver of economic growth. “While a higher level of consumer borrowing is something that’s fueled economic growth, there are limits to that,” McBride cautioned.
Despite the Federal Reserve cutting rates in July for the first time in more than a decade, the price Americans pay to service their debt has been creeping up — and future rate cuts are no guarantee that borrowers will see any measurable relief. A quarter-percentage-point rate cut would save borrowers about $1.5 billion by the end of the year, Gonzalez said.
In reality, these savings wouldn’t likely stretch as far as borrowers might hope. Schulz at CompareCards estimated that even with a half-percentage-point rate cut from the Fed, borrowers with $6,000 in credit card debt and making $250 monthly payments would save only between $63 and $72 off their total debts, depending on their credit scores.
Higher interest rates offered by lenders are a primary culprit. WalletHub says average credit card APRs for people with good credit and business credit cardholders — at 20.9 percent and 18.5 percent, respectively — are the highest they’ve been since it began tracking rates in 2010.
For people with less than stellar credit, even those rates might be out of reach, McClary said. For example, a new applicant with a credit score in the low 600s might be offered an APR of about 22 percent, he said.
“That’s a pretty high interest rate, and when people carry that debt from month to month, that cost is a burden, and it can sometimes be the tipping point for people who are living close to the edge financially.”