Americans added $26 billion to their credit card balances by the close of the winter holiday season, according to the latest Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York (FRBNY). That’s a 3.2% increase over the third quarter of 2017.

Credit card balances represent just $834 billion of the $13.15 trillion in total household debt Americans held at the end of 2017. It’s the smallest category of debt after home-equity lines of credit. Since the end of 2016, Americans have increased their credit card balances by $55 billion.

Graph of non-housing debt balance since 2004.

The most important thing to understand about these data is that credit card balances are not the same as credit card debt. Consumers who pay their credit card bills in full each month – about 78 million Americans – have credit card balances. Only those who don’t pay their balances in full have credit card debt. About 200 million Americans use credit cards, but only about 122 million Americans have credit card debt.

Higher Credit Limits, Steady Delinquencies

Consumers’ aggregate credit card limits increased by 1%, the twentieth consecutive quarter of increases.

Balances that became 90 or more days delinquent held steady at 4.6% compared to the third quarter but were higher than at the end of 2016. Credit cards have the second highest delinquency rate after student loans. This statistic makes sense, since the penalties for not paying your mortgage or your auto loan – repossession – are much stiffer than those for not making your minimum credit card payment.

Graph showing the percent of balance in delinquency by loan type.

Consumers had greater access to credit overall in 2017, TransUnion reports. Positive factors included a strong economy and low delinquencies. Risks going forward include rising interest rates and the uncertain effect of the recent tax reforms. (See How the GOP Tax Bill Affects You.) The average credit card rate in late February, as reported by Bankrate, is 16.83% variable. Along with the Fed’s 0.25% interest rate hike in mid-December, rates have increased from 16.61%. But anticipated increases in GDP, personal income and employment bode well for 2018.

What Do Rising Credit Card Balances Mean?

Credit card balances could become a problem the next time a recession hits or if interest rates climb faster than income. Households that normally pay their balances in full might start making smaller payments. Households that normally make minimum payments or slightly more than that might stop paying altogether, increasing delinquency rates. Seriously delinquent balances matter because lenders might 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.

For 2018, TransUnion made several predictions about credit card trends. The credit bureau expects delinquencies to remain manageable because there were more subprime and near prime new cardholders in 2016 and early 2017 than in late 2017. That means banks aren’t extending as much credit to borrowers who are at higher risk of not paying off their balances. Yet “manageable” doesn’t mean unchanged. TransUnion expects serious delinquencies to increase from 1.86% to 1.96% by the end of the year as the prime rate increases (the FRBNY’s data come from Equifax, so they’re not identical to TransUnion’s numbers).

TransUnion also expects consumers to end 2018 with about 1% more credit card debt. Consumers with balances are expected to end the year carrying $5,675 in credit card debt versus $5,626 at the end of 2017. With average interest rates around 17%, a consumer who owes $5,626 on credit cards (the current average balance) and sends in a minimum payment of 2% of the balance each month will pay about $926 in interest over the year. If that consumer never pays more than the 2% monthly minimum they will pay a staggering $12,406 in interest by the time the balance is paid off. (For help in digging out of debt, read How to Consolidate Credit Card Debt and Pay It Off.)

Total Household Debt Is Rising, Too

Rising household debt levels may indicate that consumers are cash-strapped and need to borrow to make ends meet. Rising debt could also mean that consumers are living beyond their means and are borrowing to keep up with an inflated lifestyle. To the extent that economic growth relies on consumers continuing to take on more debt, the risk of recession increases.

Indeed, the National Bureau of Economic Research (NBER) says an increase in household debt relative to a country’s GDP is a strong indicator of a weakening economy. U.S. GDP grew by 2.3% in 2017, while household debt grew by 4.3% ($572 billion divided by $13.15 trillion). On a more positive note, data from the Federal Reserve Bank of St. Louis show that the ratio of U.S. household debt to GDP has declined since the recession ended and was stable from the beginning of 2015 through October 2016, the latest month for which its data are available.

Similar to the NBER, the International Monetary Fund predicts that an increase in the household debt ratio will likely help economic growth and employment, but that in three to five years, growth slows and a financial crisis becomes more likely. At first, the IMF notes, consumers spend more, and the economy grows. Later, consumers have to pull back on spending to manage their debt, which reverses growth and contributes to unemployment.

The Bottom Line

Total credit card balances are on the rise, and more than one-third of credit card consumers repay their balances in full each month. But if total household debt – which includes credit card balances, auto loans, student loans and mortgages – continues to increase faster than GDP, we might see an economic slowdown and an increase in unpaid credit card debt in the next few years.

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