The Wall Street Journal ran a story this past Friday about how US credit card balances are approaching an all time high. US credit card balances could hit $1 trillion by the end of 2016… and that’s not necessarily a bad thing. Per the article:
U.S. credit-card balances are on track to hit $1 trillion this year, as banks aggressively push their plastic and consumers grow more comfortable carrying debt.
That sum would come close to the all-time peak of $1.02 trillion set in July 2008, just before the financial crisis intensified, and could signal an easing of frugal habits ingrained by the recession.
This metric reflects credit card balances, presumably including those being paid off. When you consider that there are 250 million adults in the US and divide a trillion dollars by that, you get average credit card balances of ~$4,000 per person. What we don’t know is how much of that is credit card debt, rather than simply a balance during a payment period.
It’s not just credit card balances which are approaching an all time high, but also auto loans, which have reached an all time high of over a trillion dollars. However, I’d say on average having an auto loan is a much wiser decision than carrying credit card debt.
It’s not surprising that banks are loving this, given the low interest rate environment. Issuers are raising credit limits, giving out more cards, and in many cases improving perks:
Card issuers are trying to capitalize on the good times by raising customers’ credit limits, giving out more cards and pumping up perks.
“We’ll continue to take this opportunity as far as it will take us,” Richard Fairbank, chief executive at Capital One Financial Corp., said in a recent conference call with investors.
While standard interest rates are still very low, credit card interest rates average 15%+, meaning there’s huge money in this for card issuers. The article specifically mentions Capital One, Citi, and American Express, and how their businesses are changing this year:
Capital One, the nation’s fourth-largest credit-card issuer, said credit-card sales jumped 14% in the first quarter from a year earlier. The company’s strategy to boost card usage by raising spending limits and giving out more cards is also paying off: Capital One customers spent 20% more on their cards during the first three months of the year than they did a year ago.
At Citigroup Inc., average credit-card balances in the first quarter posted the first year-over-year increase since 2008. Such balances also grew at Discover Financial Services Inc. and J.P. Morgan Chase & Co., the nation’s largest lender.
Even American Express Co., which historically has focused on customers who pay their bills off every month, is now concentrating on lending money to consumers who keep a balance.
Many argue that high credit card balances are a good thing, since it means consumers feel comfortable spending, and feel good about the economy.
I’d say that’s true, up until the point that people are carrying balances, since I imagine most people aren’t financing purchases at credit card interest rates as a conscious decision, but rather as a last resort.
I should note that credit card debit isn’t always a bad thing. Several cards have 0% APR offers for an introductory period, which many people like to take advantage of to pay for large purchases over time. You’ll only want to do that if you know you can pay off the purchase at the end of the promotional period, though, so you’re not stuck paying 15%+.
As I’ve often said, you should only get heavily involved with credit cards if you can manage your credit responsibly. I view a credit card the same as I view a debit card — I view all purchases as if they’re being debited directly from my bank account. Those who view their credit limit as their spending limit for the month probably shouldn’t be getting more credit cards.
Bottom line
Financing purchases on credit cards continues to be huge business for issuers, and I expect we’ll see more creativity in this space over the coming months and years, in the form of more introductory 0% financing offers, increased credit lines, etc. Always remember to use your credit responsibly.
If your goal is to finance something on a card, be sure you’re using a card which offers an introductory 0% interest rate, rather than a card with a ton of perks and a 15%+ interest rate. Those perks almost certainly won’t be worth it.
(Tip of the hat to Mike)
@snic "Does it bother you at all that all the miles and points you get from credit card bonuses and spending are essentially paid for by people who carry balances?"
I don't know about Lucky, but it doesn't bother me at all. Now if I was in the business of suckering clueless people into getting ccs, building up large balances, and struggling to pay them off, THAT would bother me. But I'm not, and if...
@snic "Does it bother you at all that all the miles and points you get from credit card bonuses and spending are essentially paid for by people who carry balances?"
I don't know about Lucky, but it doesn't bother me at all. Now if I was in the business of suckering clueless people into getting ccs, building up large balances, and struggling to pay them off, THAT would bother me. But I'm not, and if I stop harvesting miles and points from the banks, those people will continue their profligate behavior. I am in no way responsible for that. Nor am I taking anything that is rightfully theirs. I'm just being given perks by the banks that profit by their clueless spending. My dropping out of the game would not benefit them in the slightest. ;)
Matt said:
"Hold on here! Yes, banks make SOME of their money from people who carry a balance. Remember that those who carry a balance ALSO carry much higher default risk (eg Banks don’t get paid back). Banks ALSO make their money on the 2-3% interest rate charge on each purchase which has nothing to do with carrying a balance."
First, the transaction charge on each purchase isn't interest. It's a fee for performing a...
Matt said:
"Hold on here! Yes, banks make SOME of their money from people who carry a balance. Remember that those who carry a balance ALSO carry much higher default risk (eg Banks don’t get paid back). Banks ALSO make their money on the 2-3% interest rate charge on each purchase which has nothing to do with carrying a balance."
First, the transaction charge on each purchase isn't interest. It's a fee for performing a service - and most of it goes to Visa or Mastercard, not the bank (or to Amex).
If you want to get a good idea of why balance-carrying cardholders are far more profitable for banks despite their greater probability of default, do some reading on peer-to-peer lending. These are new models of lending where borrowers apply for loans online, and ordinary people can invest by funding the loans. (Lendingclub.com is one of the platforms for this.) What's interesting about this is that after several years, it's become VERY clear that the best returns can be obtained by funding the borrowers with the worst credit. These people of course have a high default risk, but they pay very high interest rates (but usually STILL lower than typical credit card rates). If you funded a hundred different borrowers, you'd generally find that the interest they pay more than makes up for the defaults, which is why lending to these people is so lucrative.
That is precisely why banks make most of their money from people who carry balances, not the rest of us. Remember, they are charging even HIGHER rates than peer-to-peer lenders. It is the fact that credit card lending is so incredibly lucrative that allows banks to pay for all the miles/points that keep us as their customers.
@matt
Bingo. There is another credit bubble coming and it's not pretty. Despite all the statements of "unemployment" coming down, wages remain stagnant and there is no income growth.
Translated: This citation makes clear that people are making ends meet via consumer credit-- especially if we are near the 2008 all-time peak-- and that's not a good thing. Really.
@Farnorthtrader
I said Ben's post on credit card and auto loan debt is SYMPTOMATIC of a larger credit bubble.
"Government regulators say the debt-to-income ratio (DTI) for home buyers can go up to 43% before they risk running into trouble. The DTI measures all monthly loan payments — for things like credit cards, cars and mortgages — against monthly income. Three years ago, 22% of home buyers were above this limit. In March, that number...
@Farnorthtrader
I said Ben's post on credit card and auto loan debt is SYMPTOMATIC of a larger credit bubble.
"Government regulators say the debt-to-income ratio (DTI) for home buyers can go up to 43% before they risk running into trouble. The DTI measures all monthly loan payments — for things like credit cards, cars and mortgages — against monthly income. Three years ago, 22% of home buyers were above this limit. In March, that number was up to 28%.
For context, back in the early 1990s, when the fear of housing-market blowups wasn’t yet a “thing” thanks to more conservative lending standards, only about 5% to 10% of loans were at or above the 43% cutoff.” From a Marketwatch article this website won't allow me to cite.
*Are
@Credit
A quick Google search suggests that there is 242 million adults in the US; which is close to the 250 million figure Ben pegged it at.
@pavel - lol - I remember when I first helped my fiancée with her finances - she was actually pretty good at saving and paying bills but didn't shop around for better rates. Her school loans were at 12%! I couldn't sleep until we got those changed. I can't imagine having 48k in credit card debt though - might have to let that one go haha
When I was 23, I was dating a woman my age and she asked one day if I could help her with her budgeting. So we took a look at her income (around $40k at the time) monthly spending and her outstanding debt. $48,000 in credit card debt. I was astounded. She didn't really seem to appreciate how insane that was. That *did* explain her impeccable fashion sense, though. :D
I carry no balances and have a good credit score but have been shocked at the amount of credit I have been given.
Currently 11 credit cards and about 3 times my annual income in available credit.
How much available credit to others have?
Let's not get too excited here. The average American family income is about $52,000 and net worth is about $135,000 and would have about 1.5 adults, so, using the average here, would have $6000 in credit card debt with payments of about $1800/year and interest of about $960/year if all of it is being carried with interest. That makes their credit card debt about 4% of their net worth, payments about 3% of their income...
Let's not get too excited here. The average American family income is about $52,000 and net worth is about $135,000 and would have about 1.5 adults, so, using the average here, would have $6000 in credit card debt with payments of about $1800/year and interest of about $960/year if all of it is being carried with interest. That makes their credit card debt about 4% of their net worth, payments about 3% of their income and interest about 2% of their income, so it isn't exactly a crisis. The other thing is that interest rates and payments on credit card debt is relatively inelastic, so when rates rise, credit card rates rise more slowly and payments usually don't increase at all. The only debt that can cause a nationwide crisis is mortgages, whose rates and payments can rise precipitously and whose share of the typical family budget is substantially larger than any other debt class. Credit card debt is often a crisis for a small number of individuals, but will never be the cause of a crisis for the national economy.
@Farnorthtrader
I said Ben's blog post on credit card and auto loan debt is SYMPTOMATIC of a new credit bubble, as it was for the last one.
“Government regulators say the debt-to-income ratio (DTI) for home buyers can go up to 43% before they risk running into trouble. The DTI measures all monthly loan payments — for things like credit cards, cars and mortgages — against monthly income. Three years ago, 22% of home...
@Farnorthtrader
I said Ben's blog post on credit card and auto loan debt is SYMPTOMATIC of a new credit bubble, as it was for the last one.
“Government regulators say the debt-to-income ratio (DTI) for home buyers can go up to 43% before they risk running into trouble. The DTI measures all monthly loan payments — for things like credit cards, cars and mortgages — against monthly income. Three years ago, 22% of home buyers were above this limit. In March, that number was up to 28%.
For context, back in the early 1990s, when the fear of housing-market blowups wasn’t yet a “thing” thanks to more conservative lending standards, only about 5% to 10% of loans were at or above the 43% cutoff.”
http://www.marketwatch.com/story/the-next-housing-crisis-is-pending-2016-05-04
@Dan Palangio Not to get too far afield from Lucky's post, but no student is "forced" to pay for college using credit cards. Student loans exist for this purpose, and even then, students are voluntarily attending a college knowing up-front the cost of tuition, room, board, and fees. Yes, Americans are tremendously bad at managing money. That's why so many students attend expensive private universities when in-state colleges and universities are far better value for...
@Dan Palangio Not to get too far afield from Lucky's post, but no student is "forced" to pay for college using credit cards. Student loans exist for this purpose, and even then, students are voluntarily attending a college knowing up-front the cost of tuition, room, board, and fees. Yes, Americans are tremendously bad at managing money. That's why so many students attend expensive private universities when in-state colleges and universities are far better value for the money. Of course, I paid my tuition with a credit card in order to get the points ;)
@Chrissy - same experience here from some of my friends. It is scary - even more so now a days when students are forced to pay for college using credit instead of loans with equally depressing and exorbitant rates...
Lucky - Does it bother you at all that all the miles and points you get from credit card bonuses and spending are essentially paid for by people who carry balances? They are actually the ones who are the most lucrative for banks, not those like you and me who pay off our balances without paying a dime in interest. I certainly don't care about whether big banks are taking a net loss on me,...
Lucky - Does it bother you at all that all the miles and points you get from credit card bonuses and spending are essentially paid for by people who carry balances? They are actually the ones who are the most lucrative for banks, not those like you and me who pay off our balances without paying a dime in interest. I certainly don't care about whether big banks are taking a net loss on me, but it bugs me a little that my first class flights are, in a way, paid for by people who may not have a choice about whether to take on credit card debt to get by day-to-day.
Hold on here! Yes, banks make SOME of their money from people who carry a balance. Remember that those who carry a balance ALSO carry much higher default risk (eg Banks don't get paid back). Banks ALSO make their money on the 2-3% interest rate charge on each purchase which has nothing to do with carrying a balance.
So I was telling a friend about the sign up bonus of the Hyatt card and he was highly skeptical, saying "that's too good to be true; companies don't give you something for nothing." Then he explained to me, "but you do realize that they will soak you with interest charges, so the rooms aren't really free at all."
It absolutely didn't occur to him that one might just pay off all the charges each...
So I was telling a friend about the sign up bonus of the Hyatt card and he was highly skeptical, saying "that's too good to be true; companies don't give you something for nothing." Then he explained to me, "but you do realize that they will soak you with interest charges, so the rooms aren't really free at all."
It absolutely didn't occur to him that one might just pay off all the charges each month to avoid fees. To him, credit cards don't work that way.
Scary. Once I realized his mindset, I agreed that a different credit card (or no credit card) would be a better fit for him. He was absolutely astonished when I revealed I've never paid a cent of interest to a credit card company although I charge most of my monthly expenses to them.
"Always remember to use your credit responsibly"
This is excellent advice, and kudos to you for posting it.
But still:
God Bless the Clueless who spend irresponsibly and carry huge balances. Because of the profit Banks make from them they are able to offer the savvy Miles and Points Game Players huge sign up offers and bonused spend deals. If everyone paid everything off before it posted, the way I do, we would be getting zilch from our cards. ;)
It would be useful to provide the mean per-capita debt with a 1) standard deviation, 2) as a measure of % of household income and 3) as a % of credit utilization. My monthly credit balance regularly exceeds 10000USD. However, none of that is debt since I pay off my balance on time while ensuring that my credit utilization is under 5%. I wonder how much of the statistics represent debt versus just monthly balances....
It would be useful to provide the mean per-capita debt with a 1) standard deviation, 2) as a measure of % of household income and 3) as a % of credit utilization. My monthly credit balance regularly exceeds 10000USD. However, none of that is debt since I pay off my balance on time while ensuring that my credit utilization is under 5%. I wonder how much of the statistics represent debt versus just monthly balances. Of course differentiation between credit cards and financing also needs to be made. The US has some of the lowest interest rates on mortgage and auto loans in the world, so it's hardly a surprise that most financially savvy individuals opt for a mortgage and loan as opposed to individuals in other areas of the world where single digit interest rates are unheard of.
Hopefully this means a sharp drop in the housing market so I can finally buy a house
Total balances is misleading. They should report total balances that are older than the grace period. My monthly balances are more than $4000 a month, so in that sense I am an average American. My balances that are older than the grace period are precisely $0 though.
What a bunch of spendthrifts here!
Having worked in the financial industry, I have seen the tremendous debt loads of the average American. It is astounding that the typical household would not be able to pay an emergency debt of only $1000. One of the major causes is that the average American feels entitled to instant gratification. Want a coffee, no problem. Need the latest electronic gadget, get it. Guess what - these are wants, not necessities. Do I lack sympathy...
Having worked in the financial industry, I have seen the tremendous debt loads of the average American. It is astounding that the typical household would not be able to pay an emergency debt of only $1000. One of the major causes is that the average American feels entitled to instant gratification. Want a coffee, no problem. Need the latest electronic gadget, get it. Guess what - these are wants, not necessities. Do I lack sympathy - to some degree because I've seen so much garbage purchased. For many, the problem is not being underpaid, it's overspending. I am frugal, but not cheap. I do not take it out on others (oh let's not tip or tip less, because I deserve my money more than other people). I simply make do with old, but well made clothing, a 20 year old tv, and so on.
I sometimes read financial help blogs and chats, and I'm amazed at how much credit card debt people rack up. People, it's not free money! I'm glad I didn't follow my parents' example and have always been careful about money and done a ton of research on my own, but sheesh! The only time I carry a balance is if I have a big purchase and can do a zero interest rate balance transfer, but...
I sometimes read financial help blogs and chats, and I'm amazed at how much credit card debt people rack up. People, it's not free money! I'm glad I didn't follow my parents' example and have always been careful about money and done a ton of research on my own, but sheesh! The only time I carry a balance is if I have a big purchase and can do a zero interest rate balance transfer, but I still hate seeing that balance so I get ride of it asap. Just because you can spend all that money doesn't mean you should. It's not magical pixie dust. It's real money that needs to be paid back.
The important point Lucky has raised is credit card and auto loan debt is right up where it was when the US last credit financial crisis happened. So are housing and stock prices. This is all driven by the Fed attempting to stimulate the economy, but instead creating new asset bubbles and a new credit crisis. The next fallout should be a doozy!
Not 250 million. More than 300 million. And about 1/3 probably cannot get cards: minor, no job etc.
So around 200 million.
I think.
@ Credit -- My figures were based on the US census in terms of the percentage of the population over 18...
I think you should look at the chart published by the Wall Street Journal concerning the Ownership Society among the top 1%, the next 9%, and the bottom 90%. When it comes to "total debt" v. "principal residences", you will see the story.
For your airline/hotel perks, the devaluations (due to oligopoly boardrooms) with minimum spends in the thousands is exactly one main reason to increase unsecured debt----all with FOMC zero interest rate policies not...
I think you should look at the chart published by the Wall Street Journal concerning the Ownership Society among the top 1%, the next 9%, and the bottom 90%. When it comes to "total debt" v. "principal residences", you will see the story.
For your airline/hotel perks, the devaluations (due to oligopoly boardrooms) with minimum spends in the thousands is exactly one main reason to increase unsecured debt----all with FOMC zero interest rate policies not given to credit card borrowers. Banks have to loan money or they will collapse.
@Farnorthtrader : You too read that chart. Americans ARE carrying that much interest bearing credit card debt, and it's increasing.
I don't know how much difference it makes, but that credit card debt total would include all reported balances, including those that are still in their grace period. Americans are not carrying this much interest bearing credit card debt.
@ Farnorthtrader -- Good point. Updated the post to reflect that. Thanks.