After Consecutive Interest Rate Hikes, Americans' Debt Pressure Has Actually Been Reduced?

We've constantly seen the headlines about record credit card debt, highlighting that the figures have reached an all-time high. But that's only part of the story. The full view of credit cards seems different.

Should we be concerned about the record-high number? Is the situation deteriorating? How will it impact the economy and consumer spending? Here is what we could find in the latest stats.

The chart depicting the total outstanding credit card balances clearly indicates a significant increase in the card balances, which has been consistently rising for the past decade. Meanwhile, the bank interest and delinquency rates turned upwards when the Fed started to raise interest rates.

The rising delinquency rates are a cause for concern. It's the one sign we can take from the credit card data that will raise the red flag for a struggling consumer. When this gets abnormally high, it has normally coincided with a recession in the past.

Now, with the expectation that the Fed starts to lower rates, does this delinquency concern that so many point to as a looming concern go away? It very well could.

If we look into the delinquency status further, we can see it's slightly up overall, but nothing alarming. No current category sticks out as we look back through the past 20 years for comparison.

■ The share of consumers with debt in collections dropped to a historic low

Data from Axios showed the American people are actually at historic lows for debt in collections. Although it isn't just for credit cards, it still gave us a view that US resident leverage is not high now.

The large number ($1.08 trillion) in credit card debt alone sounds like a problem. However, the credit card to a percentage of total deposits or money in the bank is only 6.1%, also near a 20-year low. In terms of credit card debt as a percentage of disposable income, it's also below the pre-COVID level and significantly below the levels seen in the 2000s.

■ First reason: the rise in incomes has helped consumers handle debt.

The huge fiscal stimulus during the epidemic has left residents with ample cash. Since 2022, income growth has been driven more by wages and salaries. The inflation-wage spiral reinforces this trend. Furthermore, the development of artificial intelligence since the end of last year has enabled the technology industry to reverse its original weakness and create more job opportunities.

■ Second reason: The appreciation of assets reduces debt pressure relatively.

We've also seen a fall in debt across the board as a percentage of total assets. Assets are up much more than debt across all percentiles of income. Some income percentiles are at their lowest levels in 20 to 30 years.

From Q4 2019 to Q2 2023, the increase in the US economy, household net worth, and home equity is significantly higher than the increase in credit card debt.

Contrary to popular belief, these findings suggest that consumers are financially stable. In fact, they have managed their finances so well that the average credit (FICO) score has reached an all-time high. The FICO score stands at a high of 718 in 2023, while it was 706 in October 2019.

To sum up, the metrics of credit cards, like many others, can be portrayed as a much bigger issue than it is. But the full story means that credit cards don't necessarily cause an economic storm in the foreseeable time frame.

Source: Spilled Coffee