Americans are in more debt than ever

Last week, I wrote about how the average credit card rate has fallen considerably since July 2019 (from 17.80% to 16.13%), yet the average accountholder assessed interest is paying a much higher rate (17.13%, which is within one basis point of the record high). Here’s another conundrum for you: Americans’ total debt load is a record $15.24 trillion, yet we are handling it remarkably well.

In fact, the current delinquency rate is the lowest on record, according to the New York Fed. Household debt service payments relative to disposable personal income hit a record low earlier this year, and have increased only slightly since then, Federal Reserve data indicates.

Some of this is a bit artificial because most Americans received three rounds of stimulus payments in 2020 and early 2021 and many used this to pay down debt. Also, federal student loan payments have been paused since March 2020 (that program is slated to end in early 2022), and federal mortgage forbearance has also been widely available – although time is running out for many enrollees and has already run out on some.

Revolving debt has been a bright spot

Credit card debt, for instance, is 13% lower now than it was at the end of 2019, per the aforementioned New York Fed report. And the amount of money owed on home equity lines of credit has been falling steadily for more than a decade. Those balances have plummeted 56% since Q1 2009.

Mortgage debt, on the other hand, has surged. Americans currently owe a collective $10.67 trillion on their mortgages, 12% more than at the end of 2019. Mortgages comprise 70% of Americans’ total debt. The housing market has been red-hot during the pandemic, although historically low mortgage rates have softened the blow to borrowers. Credit card rates are about five times higher, on average.

The personal saving rate recently returned to a relatively normal 7.5%. It spent a year and a half well into the double digits, spiking to 33.8% in April 2020 (when the first government stimulus payments went out and society was basically shut down) and to 26.6% in March 2021 when the third round of direct payments went out ($1,400 for most U.S. adults and their dependents).

We’ve been spending on things more than experiences

Sales of physical goods held up remarkably well throughout the COVID-induced tumult of 2020. It was services spending that nosedived. Core retail sales were 14.8% higher in October 2021 than in October 2020, the Census Bureau reports. And they were up 22.5% from October 2019. Those figures don’t include dining out or other services spending, and they also exclude car dealers and gas stations.

For a while, many people plowed the money they otherwise would have spent vacationing, eating out or commuting into debt service, savings and home improvements. At this stage of the pandemic, I expected to see more of a migration from spending on goods to spending on services. It seemed logical to think a lot of goods spending was pulled forward into 2020 and early 2021 as Americans stayed home and did renovations, bought new electronics, furniture, exercise equipment and more.

Once COVID-19 vaccines became widely available in the spring of 2021 and spending on travel, dining and events picked up, it was reasonable to assume that Americans would pivot their spending from goods to services. Services spending did accelerate, but surprisingly, spending on physical goods did as well.

Where is all of this money coming from?

So far, it appears Americans still have money to burn. Some of that is due to excess savings from the past 18 months. It can also be attributed, at least in part, to higher wages, home values and investment balances. One thing we haven’t seen on a large-scale basis is an increase in the number of people financing these purchases with their credit cards.

I worry, though, that this holiday season may represent a turning point. Inflation is at its highest point in three decades, and now that the stimulus spigot has been turned off and the personal saving rate is back to a pre-pandemic level, there seems to be only two logical conclusions. One is that Americans will cut back on their spending, and the other is that credit card debt will rise.

I think the latter is much more likely

We’ve seen this movie before – or at least the prequel. Returning to the New York Fed’s Household Debt and Credit Report, we see that total credit card balances fell 24% from Q4 2008 to Q1 2014, during and after the Great Recession. It took a few years, but by Q4 2019, they had rocketed 41% higher to a new peak.

That pattern often plays out during and after a shock to the economy. Credit card balances decline sharply at first because consumers get nervous and lenders tighten their standards, but then we revert to our old habits. That may be good news for banks and the broader economy, but from a household perspective, it would be great to make these lower credit card balances part of your “new normal.”

I fear the progression could be much faster this time around because, economically speaking, the COVID crisis has been in fast-forward compared with the Great Recession. The COVID recession was the shortest and deepest on record. The snapback has been strong, but credit card debt is one area in which we don’t want to see a V-shaped recovery.

Bottom line

If you’re wrestling with credit card debt, be careful not to overspend this holiday season and consider debt payoff strategies such as 0% balance transfer cards, personal loans, nonprofit credit counseling and fundamentals like upping your income and cutting your expenses.

There is a lot of pressures to overspend, and with credit card rates likely to head higher in the years to come (perhaps even in 2022), now is a good time to make further progress paying down your debt.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.