Posted by Jeffrey J. Roach, PhD, Chief Economist
Tuesday, August 1, 2023
Key Takeaways:
- Credit card debt hit a new high in the first quarter of this year, just shy of a trillion dollars and rates on card debt also hit a new high since the data series began in 1972.
- The average credit card debt at the end of last year was over $7,200 and half of those individuals say it would take over a year to pay off that balance.
- The trajectory for consumer spending will likely downshift when credit card bills come due.
What’s the Latest Trend with Credit Card Usage?
Total credit card balances are getting close to a trillion dollars. As of Q1 of this year, the Federal Reserve (Fed) reported card balances were $986 billion, roughly $60 billion higher than the previous record set in 2019.
Typically, card balances fall in first quarters, but sometimes consumers present an anomaly. This year along with 2000 and 2001 were the only years where Q1 balances did not fall. Balances are growing amid higher credit card rates. At the end of last year, the average debt for card holders who had unpaid balances was over $7,200, and the most concerning part is survey respondents confess that it would take over a year to pay off those balances.
What Can Credit Card Usage Tell Us About the Future?
The growth of credit card debt accelerated into the recession of 2001 and 2008. So, the increasing rate of card debt could be a harbinger of things to come. As shown in the chart above, when an economy is slowing and going into recession, consumer spending slows and card balances grow to offset factors such as slowing real wage growth.
The increase in card balances foreshadows a weakening consumer, and as the consumer goes, so goes the economy.
Conclusion
Investors should pay close attention to unpaid credit card balances for signs of any cracking within the consumer sector. Stubborn inflation is one reason credit card debt has spiked this past year. In Q1 of this year, credit card debt reached a record $986 billion, roughly $60 billion higher than the previous peak in 2019. Amid rising balances, credit card rates reached an all-time high since the data series began in 1972, putting additional pressure on consumers.
As the economy searches for stability, we think the inflation dynamic will continue to improve throughout the year as consumer spending slows and the Fed likely pauses in September.
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