Credit cards are used as payment method and mostly paid off monthly. But 40% are used to borrow, and some people get in trouble.
By Wolf Richter for WOLF STREET.
The New York Fed today released its quarterly report on household credit, including on credit card balances, credit limits, available credit, and various measures of delinquencies, including transition into delinquencies by age, and we’ll get to them in a moment.
Credit cards: the payment method. The most important thing about credit card data, such as the data from the New York Fed today, is that credit cards are used in the US as an electronic payment method. Many credit cards come with incentives, such as 1.5% cash-back on card spending. The bank that issued the card collects a fee from the merchant, such as 3%, for each transaction, retains some of the fee as profit, and kicks back part of the fee to card holders as an incentive to run more payments through its credit card so that the bank can collect more fees. The merchants that pay the fees ultimately figure it into the prices of the merchandise, which consumers then pay – even fossils who still pay cash.
About 60% of credit card accounts do not carry revolving balances, according to the most recent data from the American Bankers Association. These card holders pay off their credit cards in full every month by due date, or they do not use the cards at all. In other words, 60% of the cards are used exclusively as payment method or are not used, and they don’t accrue interest.
About 40% of credit card accounts had revolving balances, down from 44% in Q4 2019. This is 40% of the number of accounts, not 40% of the outstanding balances.
So even as credit card balances outstanding have returned to pre-pandemic levels, as a reflection of spending, the number of accounts that carry interest-bearing balances has fallen by 10%, according to American Bankers Association data.
Households have lots of debt, but credit cards aren’t the problem.
Credit card balances outstanding in Q4 grew by $56 billion from Q3, reflecting the holiday spending binge and inflation that is flushed through credit cards as payment method. This brought total credit card balances outstanding to $986 billion, a new high.
“Other” consumer loans, such as personal loans, payday loans, and Buy-Now-Pay-Later (BNPL) loans, rose by $17 billion, to $507 billion in Q4, having now finally squeaked past the high 20 years ago. Unlike credit card balances, most of these “other” balances are interest bearing, but not all: For example, BNPL loans tend to be subsidized by the retailer.
These are aggregate dollars, not adjusted for 20 years of inflation, population growth, and income growth. In other words, these balances are low in relative terms compared to 20 years ago – and we’ll get to that in a moment:
Credit card & “other” balances as percent of disposable income.
Credit card balances and “other” consumer debt combined in Q4, after the holiday spending binge, ticked up to 7.9% of disposable income (income from all sources minus taxes and social insurance payments). But that was up from the historic lows during the pandemic, and roughly back in the normal range in the years just before the pandemic.
Twenty years ago, credit card balances amounted to 14% of disposable income.
Credit card balances dwindle in importance as debt.
In Q4, credit card balances and “other” consumer debt combined ticked up to 8.8% of total consumer debt – includes mortgages, HELOCs, auto loans, and student loans – roughly in the range of the pre-pandemic low in 2014, but just over half of its share in 2003 when they amounted to over 16% of total consumer debt. In other words, credit cards and “other” consumer loans are not the problem for consumers; they have piles of debt, but it’s elsewhere:
$3.4 trillion in available unused credit.
The chart below shows total credit card balances (red line) which reached $986 billion in Q4, and the total credit limit (green line), which grew to $4.4 trillion in Q4, with over $3.4 trillion in unused credit still being available for consumers to draw on. Alas, with an average credit card interest rate of 20% these days, it’s not a very tempting proposition for many consumers:
Delinquent balances normalize below pre-pandemic levels.
The pandemic monies handed directly to consumers and the monies that consumers didn’t have to pay, such as via mortgage forbearance and eviction bans, left consumers with a lot of extra money, and many that had fallen behind caught up, creating this historic trough in delinquencies. That phase of the American Dream has largely ended, and it’s back to the normal grind.
Credit card balances that transitioned into early delinquency – meaning they became 30 days or more past due during the quarter – ticked up every quarter in 2022, from the historic lows in 2021. In Q4, 5.9% of total balances were 30 days or more delinquent, but that was well below the 6.4% to 7.0% range of the Good Times in 2018 and 2019. During the Great Recession, delinquent credit card balances spiked to 14% of total balances (red line):
Balances of “other” consumer loans, such as personal loans, that transitioned into delinquency rose to 6.3%, matching the pre-pandemic low in 2015:
Who is transitioning into serious delinquency?
More borrowers but on average with smaller balances transitioned into 90-day or over delinquencies in Q4 than before the pandemic, driven by younger borrowers, according to findings by the New York Fed released in a blog post today.
The number of borrowers in their 20s through 40s who transitioned into 90-day-plus delinquencies rose from the historic lows to above pre-pandemic levels. More borrowers, but with smaller balances.
The number of borrowers in their 50s who transitioned into 90-day-plus delinquencies rose from historic lows to roughly pre-pandemic levels.
The number of borrowers in their 60s and 70s who transitioned into 90-day-plus delinquencies also ticked up from historic lows, but remain below pre-pandemic lows (image via New York Fed):
Third-party collections dropped to new historic low.
And as final checkup of the health of household credit card usage: The percentage of consumers with third-party collections – which is where defaulted credit card accounts tend to eventually end up – fell to 5.2%, the lowest on record, and down from 14.6% of consumers after the Great Recession.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.