Credit cards are the primary payment method and are paid monthly. The importance of borrowing is declining year by year.
Written by Wolf Richter for WOLF STREET.
Credit card balances include accrual balances and non-interest accrual balances that are fully due and due. Many Americans use credit cards purely as a payment method (and to receive things like 1.5% cash back), not as a borrowing method. Credit card balances are therefore a measure of spending rather than borrowing.
Fitch estimates that total credit card payments in the United States will reach $4.6 trillion in 2021. Only a small amount of expenditure was not fully repaid and added to the interest-bearing debt.
Credit card balances increased $38 billion from the previous quarter to $930 billion in the third quarter, according to the New York Fed’s Household Debt and Credit Report. This $930 billion of his includes non-interest accruing deals that occurred mostly in September and were fully repaid in October.
Credit card spending has been fueled by a resurgence in travel, with credit cards being used as a payment method for hotels, flights, car rentals, meals, and more. Soaring costs are driving even more money through credit cards. However, cardholders paid off nearly all new credit card payments during the quarter.
The household has a lot of debt, but the problem is the mortgage, not the credit card.
Immediately, we look at credit card balances as a percentage of total consumer debt and as a percentage of disposable income. We also look at delinquencies and third-party collections. Revolving credit burdens are now a fraction of what they have been in years and decades, delinquency rates are starting to rise but are still below pre-pandemic lows, and third-party collections are on record. It has fallen to a very low level.
As bookings for airline tickets, hotels, entertainment venues, sports venues, restaurant meals, etc. plummeted during the pandemic, the use of credit cards as a payment method declined, creating a large trough. It marks the collapse of spending on services. This is returning to normal as spending on services is picking up.
Still, credit card balances increased by only $43 billion in the third quarter. This indicates the ubiquitous use of credit cards as a payment method, full monthly balance repayment, and a low degree of credit card use as a borrowing method. Borrowing with a credit card can be ridiculously expensive with interest rates as high as 30%, but it makes sense because you get rebates for paying with a credit card.
“Other” consumer loans, including personal loans, payday loans and Buy-Now-Pay-Later (BNPL) loans, increased $21 billion in the third quarter to $490 billion. Most of them are interest bearing, but not all. For example, a BNPL loan may be subsidized by a retailer. These loan balances are back to 2003 levels, despite 19 years of population growth, rising incomes and high inflation.
In fact, what’s amazing is how low These balances are after 20 years of population growth, income growth, and inflation.
Credit card debt is becoming less important.
Consumers have reduced their reliance on credit card debt over the years, but credit cards have replaced checks and cash payments as a payment method.By 2021, $4.6 trillion will be spent on credit cards. over the same period, credit card balances increased by only $40 billion.
In 2003, credit card balances and other loans combined (the red and green lines in the graph above) accounted for over 16% of total consumer debt, including mortgages, auto loans, and student loans. reached. During the pandemic, this dropped to 8%. Credit card balances and other consumer debt rose to 8.6% of total consumer debt in the third quarter. This is within the lows of 2014 before the pandemic.
Debt burden as a percentage of disposable income.
Combined credit card balances and ‘other’ consumer debt totaled 14% of disposable income in 2003 (income from all sources less taxes and social security payments) . And over the years, it has declined steadily as the burden from credit card balances and “other” consumer loan balances has decreased in relation to disposable income. , fell to a historic low of 6% as stimulus boosted disposable income. It will rise to 7.6% in Q3 2022, well within its pre-pandemic lows.
Delinquency rates rise and remain below pre-pandemic lows.
Stimulus handed directly to consumers during the pandemic – stimulus checks, PPP loans, additional unemployment benefits, etc. – plus money consumers don’t have to pay – mortgage forgiveness, eviction bans, etc. – left the consumer with some extra money. Dough, and many of those who were behind on credit cards caught up.
After all this, credit card balances going into arrears (30 days or more in arrears) have increased throughout the year. In Q3, it climbed to 5.2% of total balances. This is in the same range as the pre-pandemic lows of early 2016.
‘Other’ consumer loans, such as personal loans moving into arrears, increased to 5.8% of total ‘Other’ balances, well below pre-pandemic lows.
Third-party collections hit all-time lows.
The percentage of consumers with third-party collections dropped to 5.7%, the lowest on record, down from 14.6% of all consumers after the Great Recession-driven unemployment crisis.
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