Consumer debt: Balances on credit cards set to hit near-record highs

consumer debt, girl holding credit card with laptop

At the end of 2019, Americans had racked up about $14 trillion in credit card debt. Let’s say that again with appropriate emphasis: FOURTEEN TRILLION DOLLARS! It’s an unfathomable figure, especially when you consider that the same tally was less than $1 trillion at the end of 2016. At the time, that single measly trillion was an amount we considered to be astronomical. We guffawed at the “debt crisis.” Commentators blathered about how numbers that high could be rivaled only by the debt figures of 2008, during the height of the last economic recession. And yet, here we are, shaking the fabric of time and space by not just doubling or tripling the number, no — we’ve outdone our own consumer debt by nearly fourteen times!

What. Is. Happening?

Several factors seem to be contributing to this rise in consumer debt, and it could be the by product of an increase in consumer confidence with the Trump economy overall — after all, we’ve been in an economic boom throughout his time as president. However, analysts pose a word of caution about credit card debt, regardless of the economic landscape. Debt is debt, and what one borrows, one must pay back.

One of the factors driving this rise in credit card use is a push by banks and lenders to promote their credit cards, increase consumers’ limits and offer more perks. For banks, credit cards represent one of the few profitable lines of business. Low interest rates do not have the same effect on credit cards as on other types of loans, so the margins for credit card lending are not affected as much as mortgages and other types of secured lines of credit. Furthermore, many credit cards have variable interest rates that fluctuate with the Federal rate, which means even larger margins should the Federal Reserve raise its rates.

consumer debt, hand holding debit card
Are consumers being less frugal, thus increasing debt?

Another factor that seems to be contributing to this rise has to do with a steadier economy and an improved job market, both of which add to consumer confidence for carrying extra debt. Also, lenders have increased their focus on signing up subprime customers who may have had a hard time getting credit in the past.

Companies across the board report higher consumer debt

When looking at industry figures for the first quarter of 2016, Capital One saw a 14 percent increase in credit card sales, with consumers increasing their credit card spending by 20 percent. That number has been on a steady uphill climb — a steep uphill climb — ever since. Citigroup, Discover and J.P. Morgan Chase & Co., all saw increases in average credit card balances for the first quarter of this year as well. Even American Express has shifted its focus to concentrating on customers who maintain a balance. Overall, the Federal Reserve reported that outstanding credit card balances were up for Americans in nearly every income bracket.

While this is good news for the banks and lenders, some experts warn of potential risks. Increases in credit card use could mean that consumers are being less frugal with their spending, and since the banks have been spending time focusing on subprime customers, the potential for default could hurt them again in the long run. Even though default rates are at near-record lows, the COVID-19 crisis is bound to result in some missed payments for Americans who are temporarily out of work. Those who get into trouble using credit cards may have to resort to bankruptcy as a way to manage their overwhelming debt, and that’s a scarlet letter nobody wants to where if they don’t have to. Be smart when it comes to credit card purchases; let common sense prevail.





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