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- Americans reduced credit card balances by $43 billion after the holidays, the most in eight years, according to a CompareCards analysis of Federal Reserve data released Friday for the period ending February 2018.
- However balances overall remain up 5.8 percent from a year ago, near the $1 trillion mark also seen in 2008.
- Balances now represent 7.0% of disposable income, a measure of the ability for consumers to handle credit card debt. While that’s still far below the 9.3% and higher levels we saw in the years following last decade’s housing bust, there’s a growing trend of families adding to their credit card balances faster than incomes are growing.
- Average APRs for accounts that are charged interest are up 146 basis points from a year ago to 15.32%, while delinquency rates remain relatively low.
- We can expect average APRs to increase in lockstep with each quarter-point increase in the federal funds target rate; many economists expect the Fed to make three additional quarter-point increases in the federal funds target rate in 2018.
Americans reduced holiday credit card balances the most in eight years
American consumers reduced their revolving credit balances by $43 billion after the December holidays, the largest post-holiday reduction in eight years, according to a CompareCards analysis of Federal Reserve data released Friday.
Credit card balances still at 2008 levels
However, even with the reduction after the holidays, credit card balances were still 5.8 percent higher in February 2018 than the same period in February 2017. At $986 billion in revolving credit balances ($1.03 trillion when adjusted for seasonality), we’re at levels not seen since the 2008 recession and housing bust, when many consumers, faced with declining home prices, resorted to credit card financing.
The growth of credit card balances is outpacing income growth by a significant margin. While credit card debt increased by nearly 6 percent year over year as of February, disposable personal income in the U.S. increased by only 4% over the same period.
Credit card debt is an increasingly larger percentage of income
Consumers markedly deleveraged following the 2008 recession, by paying down existing liabilities and not taking on new debt. But according to recent data, the Great Deleveraging seems to be over.
While still modest compared with the 2000s (when total revolving debt in the U.S. approached 10% of total U.S. personal income), credit card debt as a percentage of income is increasing . As of February, credit card balances were 7% of disposable income, up from 6% during much of 2015.
Credit card APRs continue to climb
Last month, the Federal Reserve made its latest quarter-point interest rate increase. While those increases often take time to affect the rates of certain loan products like mortgages and auto loans, the change is near-instantaneous and precise with credit card rates. Most credit cards issued today have a variable rate, meaning the interest rate consumers pay on credit card balances will increase or decrease based on a predetermined formula. Most credit cards use the prime rate, a rate that moves nearly in lockstep with the federal funds target rate.
Minimum payments on credit card balances will likely also increase, but only slightly, and only for accounts carrying high balances. For each 0.25% rate increase, expect the monthly minimum payment on a $5,000 balance to increase one dollar.
Delinquency rates remain low
Most consumers pay their cards on time. According to Federal Reserve data, only 2.48% of credit card accounts are delinquent (defined here as more than 60 days late on a credit card payment). Until recently, delinquency rates on credit cards averaged above 3%.
Less of a mortgage burden
Part of the reason why consumers are relatively more comfortable with credit card payments despite the higher balances, is that commitments to mortgage payments have significantly fallen. Compared with immediately before and after the housing crash, mortgage payments require a much smaller share of income, leaving more room to service other debt.
Revolving credit continues to stack up
Credit card debt continues to stack up. Collectively, Americans are carrying around $50 billion more in credit card debt than they were a year ago.
Recently, credit card debt surpassed the $1 trillion mark, which happened only once before, briefly, in 2008.