Credit cards mostly a payment method, paid off monthly. Importance for borrowing declined over the years.
By Wolf Richter for WOLF STREET.
Credit card balances include balances that accrue interest and balances that are paid in full at due date so that no interest accrues. Many Americans use credit cards purely as a payment method (and to collect the 1.5% cash-back or whatever), and not as a borrowing method. So credit card balances are much more a measure of spending, than of borrowing.
Fitch estimated that the total amount paid with credit cards in the US reached $4.6 trillion in 2021. Only a tiny amount of the spending wasn’t paid off in full and added to the interest-bearing debt.
In the third quarter, credit card balances rose by $38 billion from the prior quarter, to $930 billion, according to the New York Fed’s Household Debt and Credit Report. This $930 billion includes transactions incurred roughly in September but paid off in full in October, that are not accruing interest.
Credit card spending has been boosted by the resurgence in traveling, with credit cards being used as payment method for hotels, airline tickets, rental cars, meals, etc. Surging costs further drive up the amounts that flow through credit cards. But card holders paid off in full nearly all of the new amounts that were paid for by credit card during the quarter.
Household 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 percent of total consumer debt and as percent of disposable income, and we’ll look at delinquencies and third-party collections, and we’ll see that the burden of revolving-credit is now just a small fraction of what it was in prior years and decades, and that delinquencies started to tick up, but are still below pre-pandemic lows, and that third-party collections dropped to new record lows.
During the pandemic, the plunge in bookings for airline tickets, hotels, entertainment and sports venues, restaurant meals etc., caused the use of credit cards as payment method to decline, and that’s where the big trough occurred; it shows the collapse in spending on services. This is now returning back to normal as spending on services is recovering.
And yet, credit card balances outstanding in Q3 only grew by $43 billion, which shows the universal use of credit cards as payment method, with balances paid off in full every month, and to what small extent credit cards are used as borrowing method. And that makes sense because borrowing on 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, rose by $21 billion, to $490 billion in Q3. 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 where they’d been in 2003, despite 19 years of population growth, income growth, and rampant inflation.
What’s amazing, actually, is how low these balances are after 20 years of population growth, income growth, and inflation:
Dwindling importance of credit card debt.
Consumers reduced their reliance on credit card debt over the years, though credit cards have largely replaced checks and cash payments as payment methods. In the year 2021, $4.6 trillion was spent on credit cards, and 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) amounted to over 16% of total consumer debt, which also includes mortgages, auto loans, and student loans. During the pandemic, this dropped to 8%. In Q3, credit card balances and other consumer debt ticked up to 8.6% of total consumer debt, roughly in the range of the pre-pandemic low in 2014.
Debt burden as percent of disposable income.
Credit card balances and “other” consumer debt combined in 2003 amounted to 14% of disposable income (income from all sources minus taxes and social insurance payments). And then over the years, it dropped steadily as the burden from credit card balances and “other” consumer loan balances declined in relationship to disposable income. In Q1 2021, it dropped to a historic low of 6%, as disposable income ballooned with stimulus money. In Q3 2022, it rose to 7.6%, roughly in the range of the pre-pandemic lows:
Delinquencies tick up, remain at or below pre-pandemic lows.
The stimulus monies handed directly to consumers during the pandemic – stimulus checks, PPP loans, extra unemployment benefits, and whatnot – plus the monies that consumers didn’t have to pay – mortgage forbearance, eviction bans, etc. – left consumers with some extra dough, and many of those that had fallen behind on their credit cards caught up. Others were able to enter their credit card arrearage into forbearance programs, and the delinquent balance was marked “current.”
All this has ended, and credit card balances that are transitioning into delinquency – 30 days and longer past due – ticked up all year. In Q3, they rose to 5.2% of total balances, which is in the same range as during the pre-pandemic lows in early 2016.
“Other” consumer loans, such as personal loans, that are transitioning into delinquency rose to 5.8% of total “other” balances and remain well below the pre-pandemic lows:
Third-party collections dropped to new historic 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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