Consumers took on more debt for the holidays

Consumers took on more debt at the end of last year: Consumer credit surged 9.6% in December. That reverses a decline in November. On an annual basis, consumer credit outstanding rose a more modest 2.4%.

Total credit outstanding jumped $40.8 billion in December after dropping $5.4 billion the previous month. Taking a slightly wider view, the three-month moving average increased to $17.6 billion, which is higher than the 2010s average of $13.6 billion.

Revolving debt, made up primarily of credit cards, surged 20.2% at an annual rate in December, partially reversing a fall in November. Retail sales boomed as the holiday season was compressed into that one month, which likely reduced credit card usage in November and pushed it into December. Wealth effects, broad discounting and higher savings gave consumers the confidence to defer payments.

Consumers spent more on credit cards despite high interest rates and growing concerns about balances. Rates on credit cards in November were extremely high at 21.5%. A Philadelphia Federal Reserve research paper found that in the third quarter of last year, the share of active credit card accounts making only the minimum payment reached the highest level going back twelve years. A large bank reported that consumers are leaving higher credit card balances unpaid each month. With interest rates so high, that means higher payments take up a larger share of household income; this increases the risk of delinquencies.

Nonrevolving debt, which includes car loans, student loans and personal loans, increased at an annual rate of 5.8% after gaining 2.7% in November. December posted the largest increase in more than two years. Vehicle sales surged in December due to replacement demand after the hurricanes. The Los Angeles wildfires will likely result in more replacement demand. Some consumers say they are trying to purchase big-ticket items ahead of potential tariffs.

The data on consumer credit is not adjusted for inflation. Real consumer credit outstanding edged higher by 0.4%, reversing the decline in November.

Consumer balance sheets, especially on the lower end of the income spectrum, are increasingly stressed.

Bottom Line

Consumer credit surged in December as Americans took on more debt. Now that we are through the holiday season, the outlook is more uncertain. Consumers should not expect relief from the high interest rates on credit cards, especially since the Federal Reserve has scaled back its forecasts for interest rate cuts.

We are now forecasting no Fed rate cuts in 2025. Consumer balance sheets, especially on the lower end of the income spectrum, are increasingly stressed. Risks remain to the downside from potential shocks to inflation and/or the labor market.