Credit-Card Debt Out of Control?

Practical Economics

Is Credit-Card Debt Out of Control?

Balances are on the rise, but defaults are still low.

A dollar sign followed by 13 digits tends to swivel heads. So credit card research site CardHub’s recent prediction that U.S. credit card holders will carry roughly $1 trillion in outstanding balances by the end of the year raises questions about how consumers are faring as debt levels grow. CardHub, which issued the forecast based on data from the Federal Reserve, warns that consumers may be on the path to spending beyond their means—a return to the bad habits that predated the 2007–08 financial crisis. Credit card balances recently sat at about $885.4 billion, by CardHub’s reading of the latest quarterly figures, compared with $832.5 billion a year earlier.

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But a more nuanced look at the data shows that Americans aren’t yet using their plastic overzealously. A key measure is the rate at which credit card holders are defaulting on their debts. The 90-day delinquency rate for credit card holders was recently 7.2%, according to the Federal Reserve Bank of New York—far below the 13.7% rate reached in 2010. Delinquency rates should stay low as long as un­employment remains in check, says a recent report by Morningstar Credit Ratings, an agency that evaluates credit risk. And overall, the report says, “consumer debt growth remains modest and in line with consumer wages.” Kiplinger expects wages to rise at a moderate pace of about 2.5% for 2016 and 3% next year—a pickup from the recent growth rate of 2%.

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Consumer spending has had support from healthy increases in disposable personal income (the money left over after taxes, adjusted for inflation), although growth has slowed in recent months. This measure of financial health showed annual increases of 3.5% in both 2014 and 2015 (the biggest bumps since 2006) and grew by 2.2% in the 12-month period through June, according to the U.S. Bureau of Economic Analysis.

Moreover, household debt as a share of disposable personal income is at a low level compared with the long-term trend, says Liz Ann Sonders, chief investment strategist for Charles Schwab. “I think we are relatively far from the point where one might argue that consumers are over­extending themselves,” she says. Shifting attitudes toward spending may keep things in balance for some time. The severity of the financial crisis as well as its proximity to the tech bust of the early 2000s “changed a generation,” says Sonders: Consumers are smarter about taking on debt without having the income growth to back it up.


Michael Sullivan, a consultant with nonprofit credit counseling agency Take Charge America, says postcrisis legislation that protects consumers from such practices as sudden, drastic interest-rate hikes on their card balances has also helped. In 2007, the typical caller to the agency had $50,000 in credit card debt, he says; today, callers are more likely to carry about $5,000. “We’re finding that most people, right now, are able to manage their credit card debt,” says Sullivan.

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Finally, a look at other consumer debt provides some context. Credit card debt, higher than both auto loan balances and student loans in 2009, is now below both of those categories. Auto loan debt has reached $1.1 trillion, according to recent quarterly data from the New York Fed, although delinquencies still are a relatively manageable 3.5%. More worrisome is student loan debt, at $1.26 trillion. That’s a $69 billion increase from mid 2015, and the debt carries a 90-day delinquency rate of 11.1%, up from 8.5% at the end of 2011.