Are America’s Record Loan Debts a Warning Sign for the Economy? “The trends are definitely not good.”

By Hannah Erin Lang

The average credit card balance just hit a new record, and delinquencies have also increased. Is it a sign that Americans are happy to keep spending money — or is there cause for concern?

Genna Crites never had a balance on her credit card.

She grew up low-income in North Carolina and spent her childhood eating free lunches at school and watching her family struggle to make ends meet. After Crites was able to graduate debt-free through financial support in 2021, she began working full-time for a software company, saving nearly two-thirds of her income.

But when she began her graduate studies last fall, things changed. Crites’ savings quickly dwindled. Her part-time wage at a dessert shop near campus, about $13 to $14 an hour, couldn’t keep up with expenses. With inflation driving up prices, it became a little more difficult to cover all the basic needs of their budget, and the toll was $70 for a tank of gas. About $700 for their share of rent and utilities, plus 30 extra minutes to drive to the grocery store with cheaper discounts.

And then came the unexpected allegations: car repairs. Space heaters. Medical bills.

“Up until that point, I had really good credit,” said Crites, 24, who now has a few thousand dollar balance on her card from month to month. It is currently $2,500. “It was really scary,” she told MarketWatch.

She is anything but alone. Americans are accumulating ever-increasing credit card balances. According to the Federal Reserve Bank of New York, the country’s credit card debt burden hit a new record of $1.08 trillion in the third quarter. That’s $154 billion more than the same period in 2022, the largest annual increase since the Fed began collecting data in 1999. Defaults are also increasing.

As the economy moves forward, will the growing debt burden jeopardize the faster-than-expected growth of the American economy? Some experts view the higher balances as simply a reflection of consumers’ desire to continue spending, noting that many have enough cash in the bank to pay off their balances. Others say it’s a warning sign that even in the face of robust growth and a strong job market, some consumers are falling behind — and that household finances could quickly collapse if more Americans start losing their jobs.

“We’re not really in a danger zone right now, but the trends are definitely not good,” said Connel Fullenkamp, ​​an economist at Duke University. “When we see a rapid increase, that’s always a warning sign that people may be taking on too much debt too quickly.”

How much debt is too much?

Adjusted for inflation, the current numbers suggest that Americans actually have less debt on their credit cards than they did a few years ago.

According to an inflation-adjusted household debt report from WalletHub — which adjusts the Fed’s numbers to remove the effect of price inflation from the data — credit card balances are about $31 billion lower than they were in the fourth quarter of 2019.

Adjusting Fed data for inflation provides a more complete picture of how current household debt data compares to historical levels — especially because the purchasing power of a dollar has changed dramatically in recent years.

Credit card balances have grown steadily since a sharp decline in 2020 and 2021, when many Americans used extra cash to pay down debt during the pandemic, said Odysseas Papadimitriou, the CEO of WalletHub.

And consumers still owe less on their credit cards than on other debts, such as car and student loans. According to the study, the average American household has a credit card balance of $9,068.

That compares to an average of $13,405 for auto loans and $13,439 for student debt.

“I’m very happy with the credit card debt picture,” Papadimitriou said. “We’re not even at pre-pandemic levels.”

This adds to other data suggesting consumers have enough cash to pay their bills. WalletHub data also shows that the share of credit card balances in a household’s total deposits – the amount of cash a household has in the bank – is declining.

The amount of debt Americans are carrying accounted for about 6% of their deposits in the third quarter, a fraction of what it has been in past decades.

Callie Cox, an investment analyst at investment platform eToro, said this metric shows that many consumers are doing well when it comes to paying off their credit card balances.

“Households are generally well covered,” she said. “That’s like saying my friend financed this $30,000 sports car and I’m worried he’s taken on too much debt – and then I realize he has $100,000 in the bank.”

A big deal for the average borrower

But the rise in defaults suggests that this is not the case for every consumer.

The share of newly delinquent credit card users – those with an account at least 30 days past due – rose to 2% in the third quarter, compared to 1.7% in the first and second quarters of 2023. That’s the highest level in at least 2015.

Combined with the surge in credit card debt, that’s a troubling trend, Fullenkamp said.

“They could potentially indicate future problems,” he said. “If we see debt rising so quickly today, then there are people who will have to make cuts elsewhere later.”

Credit card defaults often don’t pose the same systemic threat to the economy as defaults on other types of loans, noted Matt Schulz, chief credit analyst at LendingTree. Take mortgages, for example: a debt burden that is twelve times greater than U.S. credit card debt and that can (and does) have devastating effects on the economy and global financial markets if defaults are widespread.

Still, credit card debt is “certainly a concern,” Schulz added.

The job market remained strong in 2023 – but if Americans continue to borrow, the consequences of a future rise in unemployment could be more severe, Schulz said.

“It’s really just about jobs. If the job market collapses, all bets are off,” he said.

And while it’s unlikely that rising credit card debt would bring the entire economy to its knees, that’s not the case for many American households, he noted.

“The financial margin for error is pretty slim for the average person,” Schulz said. “If they need to take their dog to the vet or buy a new tire… that’s important.”

That’s certainly how it feels for Crites, who is completing her master’s degree in library science this spring. She’s still unsure how she’ll keep her credit card balances low as payments begin on her nearly $200,000 in student loans.

“Some days it kills me, especially knowing that it’s not going to get better anytime soon,” she said. “It’s frustrating to see all this discussion [about how] The economy is doing great, we are recovering and we are seeing stock prices rise like I have never seen in my life.

-Hannah Erin Lang

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11/14/23 1141ET

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