September 17, 2018
According to the Federal Reserve's G.19 Consumer Credit report, America's outstanding revolving debt – mostly credit card debt – was closing in on $1.04 trillion as of June 2018. How will we pay all that money back? An increasing number of Americans may not be able to do so.
ValuePenguin analyst Joe Resendiz calls credit card defaults "a cause for concern." Resendiz highlighted increased second-quarter credit card default numbers for both JPMorgan and Bank of America as disturbing points amid generally good reports.
The second quarter 2018 Household Debt and Credit Report from the New York Federal Reserve backs up some of these concerns. At 6% of all consumer debt, credit card debt remains firmly in third place for all non-mortgage consumer debt behind student loans (11%) and auto loans (9%). However, the sheer number of credit card accounts – approximately 480 million, over four times the number of auto loan accounts and over five times the number of mortgage loans – provides an opportunity for the default numbers to rise.
Defaults are well below the 2009 peak, when 6.77% of credit cards were in default and over 13% of credit card balances were delinquent by ninety days or more. Credit card defaults in the second quarter of 2018 decreased slightly, from 2.54% in the first quarter to 2.47%. However, Federal Reserve data shows the default rate has been on a slow increase since the 2.12% trough in the first two quarters of 2015.
Consider that the credit card default rate is rising during an economic recovery. What will happen when the economy eventually contracts?
Consumer spending has been robust, but with wages staying relatively flat, it's possible that too many Americans are displaying their optimism by increasing their spending on credit – charging more than they can realistically afford to pay.
It's insightful to compare the delinquencies transition rates in different types of consumer debt. New York Fed data shows that the percentage of credit card account balances with missed payments (over thirty days delinquent) rose sharply in the second half of 2016 and stayed above 6% of balances while other forms of delinquencies (mortgages, auto loans, student loans, and home equity loans) stayed flat or decreased slightly.
The same pattern follows into ninety-day delinquencies and above, with credit cards rising in late 2016 and remaining at higher levels. Perhaps our economic boom is riding on excessive use of credit.
ValuePenguin calculated the average credit card debt at $9,333 for Americans who carry a balance. However, the credit burden can be far greater for those at the lower end of the economic spectrum. For the lowest income quintile (households making $24,999 or less annually), the average credit card debt was only $3,000 – but that's 12% of the household income for the highest incomes in that group. Burdens for the upper end of the other income groups (up to $160,000) is below 10%.
Given that credit card debt is generally the highest interest debt that most people hold, it's easy for lower-income Americans to be caught in a debt spiral that eventually leads to default.
If your credit situation is getting out of control, take steps to reign it in now. Start with a realistic budget that gives you a surplus at the end of the month. Cut expenses as necessary to get to that surplus, and then apply the surplus to paying down your debt.
The credit card default club may be growing, but it's not really a club you want to join. The dues will be painful.
If you want to reduce your interest payments and lower your debt, join MoneyTips.
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