When the COVID pandemic hit, people slowed their spending due to the uncertainty of the pandemic, the inability to leave their homes, and many losing their jobs. Increases in spending coincided with the stimulus checks that people received to help them through the crisis. After the third and last stimulus check, spending dropped but has still remained robust and well above the last two years.
Since the stimulus checks ceased, Americans have reverted to their old habits of spending; relying on debt, and consumer debt has sharply increased, particularly credit card debt, which has seen the largest increase year-over-year in the past 20 years; 15%. A large part of this can be attributed to the surging prices as inflation has dramatically risen across the globe due to supply-chain issues from the pandemic and the war in Ukraine.
- Credit card debt is generally an unsecured, revolving form of credit that cardholders can draw on regularly as long as they make payments.
- Total U.S. household debt year-over-year for Q3 2022 has increased in the majority of categories, including mortgages, auto loans, and credit cards.
- Credit card debt has increased by 15% in the last year, the largest increase in the past 20 years.
- The increase in debt has been driven by a combination of factors, including the end of stimulus checks during the pandemic as well as surging inflation.
Credit Card Debt: The Basics
Credit card debt is generally an unsecured form of debt that the vast majority of consumers hold. It involves qualifying and applying for a revolving credit line through a lender, usually a bank or other financial institution. Lenders grant a card with a specific credit limit based on a consumer's credit rating, credit history, financial situation, as well as their relationship with the customer. Balances and payment history are reported regularly to the main three reporting agencies.
You can save a lot of money by paying your credit card balances in full every month. If you don't, you'll pay more because interest is added to any outstanding balance you carry each month.
Customers can choose to pay their balances off in full every month. For those who don't, they must carry the unpaid balance month-to-month. This means they pay interest on the outstanding amount they owe. The rate charged by the lender is referred to as the annual percentage rate (APR), which is based on their credit history. And because they have a revolving limit, cardholders are able to reuse their credit after making payments to their cards.
Snapshot of American Credit Card Debt
The Federal Reserve Bank of New York issues regular reports on the status of household debt across the United States. These reports are generated every quarter and are based on data collected from Equifax, which is one of the three major credit reporting agencies in the country. This data is drawn from a random national sampling taken from Equifax.
The report released in November 2022 showed that household debt increased by $351 billion in the third quarter of 2022. This amounted to a total of $16.51 trillion in total household debt including mortgages, home equity lines of credit (HELOCs), auto loans, and credit cards.
Credit card debt increased sharply from the second quarter by $38 billion to nearly $930 billion. It increased year-over-year by $121 billion; the largest increase in the past 20 years. The number of new accounts opened was 227 million; down slightly from 232 million in the previous quarter — the highest since 2008. Credit limits for credit cards increased by $82 billion in the third quarter, after increasing by $100 billion in the second quarter — the largest increase in more than 10 years. Delinquency rates remained low in Q3 2022, after declining at the beginning of the pandemic.
The Debt Profile
The changes in American credit card debt—from balances to new issuances and delinquencies—are largely due to the global COVID-19 pandemic, which includes the fading effects of relief programs that helped consumers during the pandemic and the rising prices caused by supply-chain issues from it.
People curbed spending during the pandemic because of lockdowns, business shutdowns, and social distancing guidelines. One of the main factors that contributed to the drop in late payments and delinquencies was the Coronavirus Aid, Relief, and Economic Security Act (CARES).
It provided a series of initiatives to help consumers and businesses, including loans and grants for small businesses and an expansion of unemployment benefits for those who were furloughed from their jobs. Many lenders also allowed payment deferrals on certain credit products. The government also provided stimulus checks to help alleviate the financial burden for consumers.
Now that the pandemic has receded and these government programs have stopped, consumers are back to relying on debt to fund their lives. In addition, the supply-chain issues that arose from the pandemic have resulted in surging inflation, which has significantly increased the costs for consumers for basic items, such as food.
Problems With Credit Card Debt
Credit card balances can become a problem the next time a recession hits. Consumers who normally pay their balances in full may start making smaller payments. Households that normally make minimum payments or slightly more than that may stop paying altogether, leading to a rise in delinquency rates.
Seriously delinquent balances matter because lenders may never collect a penny on them. Then, as lenders lose money, consumers experience lower credit limits and tighter standards to get a credit card. If you were using credit during the Great Recession, you know all too well how this process works.
The current rising interest rate environment can also hurt borrowers. The Fed has been consistently increasing interest rates in 2022 with the goal of clamping down on the surging inflation. This hurts borrowers that carry balances from one month to the next as the rates they incur to do so are higher.
Other Household Debt
But what about other types of debt? As mentioned above, household debt increased by $351 billion during the third quarter. Our research has found that as of Q3 2022:
- HELOC balances increased by $3 billion to $322 billion.
- Automobile debt increased by $22 billion to $1.52 trillion.
- Mortgage debt increased by $282 billion to $11.67 trillion.
- Student loan debt decreased by 15 billion to $1.57 trillion.
Foreclosures increased by 28,500 despite the moratoria on new foreclosures and mortgage forbearances. Only 3.1% of mortgage originations were issued to subprime borrowers in the third quarter, which contrasts with the 13% average between 2003 and 2007, leading up to the financial crisis.
Student loan debt levels dipped modestly from Q2 2022 and delinquencies and defaults that were 90+ days stood at 4% of aggregate student debt.
Does Credit Card Debt Go Away?
Most delinquent debt items on your credit report disappear after seven years, which would improve your credit score. This does not mean that the debt is forgiven or that you do not owe the debt anymore, you do. And if the debt is transferred from one lender to another, it may reappear on your credit report.
How Much Credit Card Debt Is Normal?
There is not a "normal" amount of credit card debt. This answer will differ for every individual as every individual's financial circumstances are different. Ideally, if one uses a credit card, one should pay off the statement balance every month so that no balance is carried over. If a balance is carried over, interest will be charged on the unpaid amount, and credit card interest rates are high, which significantly increases the cost to the borrower.
What Happens If You Have Credit Card Debt?
If you have credit card debt your credit card company will contact you in an attempt to collect the outstanding amount. If your outstanding amount is not remedied, your account will go into default. If you continue to not pay your credit card debt, the credit card company will sell the debt to a collection agency. The agency will attempt to collect the debt from you. The outstanding debt will go on your credit report, which will hurt your credit score and make it more difficult and/or more expensive to borrow money in the future, such as if you want to purchase a home.
The Bottom Line
As relief and forbearance from government programs have receded, consumers have turned back to debt to manage spending and expenses. Rising prices across the board have further spurred debt usage, with household debt increasing in almost every category, particularly credit card debt.
The Fed has taken measures to reign in rising prices by increasing interest rates, which only makes borrowing more expensive, which should curb spending. The government, in addition, has taken steps to help alleviate the debt burden by allowing for student loan debt cancellation for some borrowers.