Consumers wary of new debt

Consumers took on less debt toward the end of the year. Consumer credit decreased 1.8% in November at a seasonally adjusted annual rate. That was only the fourth month showing a decrease after the beginning of the pandemic.

Total credit outstanding declined by $7.5 billion after growing by $17.3 billion in October. The three-month moving average dropped to $4.3 billion, much lower than the 2010s average of $13.6 billion. On an annual basis, consumer credit outstanding rose 1.7%.

Revolving debt, made up primarily of credit cards, plummeted by 12% at an annual rate after jumping 13.4% the previous month. Rates on credit cards nudged down to 21.5% in November; they were 21.8% in August. That is still much higher than the rates in the 2000s and 2010s. Overall, consumers continue to spend by using savings; they are wary of taking on more debt. The late timing of the Thanksgiving holiday likely pushed some credit card usage into December as well.

Lower-income consumers are increasingly feeling the weight of credit card debt. One survey found that nearly half of Americans were still paying down their 2023 holiday debt. Credit-scoring firm FICO found that credit scores have fallen for subprime borrowers; that adds additional stress to those with large debt balances. At the same time, a recent ruling by the outgoing administration wiped $49 billion of medical debt from the credit profiles of more than 15 million Americans.

Nonrevolving debt, which includes car loans, student loans and personal loans, rose at an annual rate of 2% in November after creeping up 0.7% in October. Rates on new car loans fell back to where they were in early 2023. The 60-month loan declined to 7.8% from 8.4% in the third quarter; the 72-month loan decreased to 7.7% from 8.8% in the third quarter. Vehicle sales and parts grew at the fastest pace since July. Along with better loan terms, that was partially due to replacement demand after the hurricanes and to get ahead of potential price increases due to tariffs.

The series for consumer credit is not adjusted for inflation. Real consumer credit outstanding edged lower by 0.45% after rising by 0.14% in October.

Lower-income consumer balance sheets are especially stressed.

Bottom Line

American consumers are growing wary of taking on more credit card debt. Debt compounds rapidly with historically high interest rates. Lower-income consumer balance sheets are especially stressed. The slower forecasted pace of rate cuts by the Fed means that consumers will not feel much relief quickly.