Explosive Rise In Credit Card Balances – Is Debt Disaster Looming?

Explosive Rise In Credit Card Balances – Is Debt Disaster Looming?

Credit card balances hold significant importance as they primarily serve to measure spending habits, rather than borrowing. According to the Federal Reserve, approximately $5 trillion was spent via credit cards in the U.S. in 2021. This article by Irving Wilkinson explores this phenomenon and its implications, as well as the rise in credit card balances by $45 billion from the first to the second quarter, against the backdrop of rising prices and increased spending.

Key Points

1. The amount spent using credit cards in the US reached approximately $5 trillion in 2021 due to a rise in prices, overall spending, and people going on traveling sprees. However, only a small part of these balances accrues interest, with most balances getting paid off the next month.

2. In the second quarter of 2021, credit card balances rose by 16.2% from the previous year to reach $1.03 trillion. Other consumer loans, including “Buy-Now-Pay-Later” loans and payday loans, also increased, reaching a total of $527 billion.

3. Despite this, banks continue to raise credit card limits, resulting in $3.57 trillion in available unused credit. Meanwhile, delinquency rates have dropped, indicating that most consumers are managing their debts effectively. However, the report suggests that delinquency rates could increase if the balances continue to rise.

Understanding the Dynamics of Credit Card Spending and Debt

How much do we really know about credit card balances? The fundamental reality here is that credit card balances largely reflect spending habits, not borrowing. According to a recent statement by the Federal Reserve, about $5 trillion was spent using credit cards in 2021. With increased spending and higher prices, this figure is set to escalate even further by 2023. But here’s a question to ponder: are we really maximizing this prevalent consumer payment method?

Before you scratch your head, let’s move on to dissect this mystery.

A Closer Look at Credit Card Debts

Most credit card balances are paid off the following month without racking up interest. A minor portion unfortunately stagnates as interest-yielding debt. In the second quarter, credit card balances rose by $45 billion to reach $1.03 trillion, rising from a previous flat rate according to the New York Fed’s Household Debt and Credit report.

Interestingly though, credit card balances and “other” consumer debt combined totaled just 7.8% of disposable income. Despite the seemingly enormous $1.56 trillion figure, we’re still in what some would label the ‘Good Times’ range pre-pandemic. So, why isn’t the credit card debt burden as daunting as it seems?

Available Unused Credit: Does More Mean Better?

Let’s delve into another mind-boggling fact: the total available unused credit. We observed a record $3.57 trillion in unused credit with banks raising the aggregate credit limits to a staggering $4.6 trillion. Even with $1.03 trillion in outstanding credit card balances, we reached this record figure. But rests the question, what does this excess unused credit imply?

A Return to ‘Normal’ for Credit Card Delinquencies

COVID-19’s ripple effect of stimulus money, forbearance, and temporary eviction bans enabled many to recover from delinquency. However, consumers are now gradually sliding back to the pre-pandemic delinquency landscape according to the report.

A Dive into Delinquency Rates

Despite a boom in newly delinquent credit card balances, a larger portion of consumers manage to settle their debts before 90 days past due. Interestingly, based on more detailed data from the New York Fed, delinquencies actually dipped, particularly for subprime and near-subprime borrowers.

The lack of transparency regarding true delinquency rates raises the question: are we really getting into more credit card debt or is it just a facade?

A Fresh Perspective on Banks and Credit Cards

Banks are capitalizing on consumer behavior by offering enticing rewards such as cash-back benefits and frequent flyer miles, turning this into a significant profit center. Conversely, banks discourage borrowing by implementing high-interest rates.

So, why do banks incentivize spending but discourage borrowing?

Why does all this matter to you?

As investors, understanding the dynamics between consumer spending, banking practices, and credit card debt can provide key insights into prevailing economic circumstances. Discerning the role of banks and policies concerning credit cards offers opportunities for strategic investment decisions. For instance, businesses leveraging on credit card usage such as travel and retail could potentially be a smart choice, provided we continue to observe robust credit card spending trends.

Providers of other kinds of consumer loans, such as personal, payday, and Buy-Now-Pay-Later loans, could also benefit from further scrutiny, as this segment shows significant growth.

In conclusion, keeping a keen eye on consumer credit behavior is essential for anticipating market trends and potential impacts on different sectors. However, as the proverbial phrase goes, don’t lift the needle until the compass point settles!

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