By The American love affair with debt took a timeout in December.
After piling on debt for much of the year – in 2023, the type of credit commonly provided by charge cards and other loans increased 8.4 percent – consumers slammed on the brakes in the last month of the year. Credit expanded by just 0.4% in the month, according to the Federal Reserve’s monthly credit report released Wednesday.
Whether that signals a trend or is just the proverbial day-after sobriety is unclear. And it still leaves consumers with record levels of credit card debt. Another report from the Federal Reserve Bank of New York showed total household debt rose by $212 billion to a total of $17.5 trillion in the fourth quarter of 2023.
Of that, credit card balances grew by $212 billion to $1.13 trillion, while mortgage balances rose by $112 billion to $12.25 trillion. Auto loan balances rose by $12 billion to $1.61 trillion and delinquency rates increased for all types of debt except student loans.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”
On Thursday, credit reporting firm TransUnion confirmed the trend with the release of its fourth-quarter analysis of credit card spending. The report found that millennials are driving the big surge in card usage, accounting for nearly 30% of all transactions.
Average card balances rose by 10% from a year ago to $6,360, a record. The Generation X share of balances was the largest, at 33.8%, followed by millennials at 29.4% and then baby boomers at 26.7%. Meanwhile, the average credit card interest rate is nearly 21%.
“Inflationary pressures and higher-than-expected living costs have led to many consumers turning to bank cards to help make ends meet in recent quarters, and Millennials are no exception,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.
The reports brought a lot of hand-wringing over the concern that consumers are overextended and therefore will drive a drop in economic activity that could put a break on what has been robust consumer spending throughout the post-pandemic period. And December’s abrupt slowdown could be a canary in the coal mine type of event.
However, the use and level of credit outstanding, when put into context, is not quite the economic crisis that some portray. Credit cards and bank cards in general are used differently by younger consumers, who may not even have written a check in their lifetime.
Also, some economists prefer to look at credit not so much as how much someone borrows as to what level of income they have to pay it. In this case, the debt-to-income ratio is the key measure and that is still looking healthy for most borrowers.
Roughly half of credit card users pay their balances in full each month, for example. This reflects the use of rewards-based cards which people may turn to more frequently as they get airline miles or other perks to compensate them for their usage. And incomes have risen quite a bit over the past couple of years, especially at the lower end of the wage spectrum.
And as for mortgage rates that have soared to around 7% most recently, “the majority of people have less than 3.75% mortgages,” having refinanced old mortgages or taken out new ones when rates were low in the early days of the pandemic, says Scott Haymore, head of pricing at TD Bank. He sees mortgage rates falling to 6% or slightly lower by the end of the year.
While household debt is more than $5 trillion higher than at the beginning of the global financial crisis in 2007, “growth in household income has significantly outpaced growth in debt over that period,” according to a Wells Fargo economics report released on Wednesday.
“Deleveraging since 2008 and the trend decline in mortgage rates that occurred until 2021 has led to a significant decline in the debt service ratio for the household sector,” Wells Fargo said.
Of course, borrowing costs have risen a lot in the last two years as the Fed raised interest rates to levels not seen in two decades in its battle against inflation. That is expected to change this year as the Fed lowers rates. A massive U-turn by consumers in their spending habits could be just the development to prompt the Fed to cut sooner rather than later.
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