The Resilient Consumer: Credit Card Balances Surpass $5 Trillion

Three years of inflation and strong consumer spending has led to rising consumer debt — especially credit card balances. In November, outstanding credit balances surpassed the $5 trillion mark for the first time.

The Federal Reserve Bank of Philadelphia reported that credit cards are performing worse than pre-pandemic levels, with delinquency rates surpassing previous highs. In response, banks are granting fewer credit line increases and reducing credit lines more frequently.

Here is one thing to watch:

Since 2021, loan growth has grown significantly. When loan growth accelerates, there is a denominator effect which suppresses delinquency rates. That is, more total loan dollars outpace the delinquency dollars.

Today, payment rates are declining, economic growth is slowing, and delinquencies are rising. As loan growth decelerates, the credit tailwind of the denominator effect will become a credit headwind.

Three potential implications on the economy and consumers:

1. Consumer Financial Fragility: The increase in credit card delinquency rates and the decline in the share of accounts making full payments suggest growing consumer financial fragility. This may have broader implications for the overall economy as individuals struggle to meet their financial obligations.
2. Impact on Credit Accessibility: The trend of fewer credit line increases and more credit line decreases by banks indicates a cautious approach to lending. This could impact consumers' ability to access credit, limiting their spending capacity and potentially affecting economic growth.
3. Housing Affordability Concerns: While credit card performance is deteriorating, first-lien mortgage delinquencies remain low. However, the Federal Reserve Bank of Philadelphia report highlights that new homeowners are spending a higher share of their income on housing expenses. This could signal concerns about housing affordability, especially with historically low first-lien mortgage origination numbers and elevated debt-to-income ratios.

These implications underscore the need for careful monitoring of consumer financial health and the potential ripple effects on the broader economy. With this credit card back drop, we will be watching earnings reports of retailers and banks in the coming quarters.

What do you think about credit card debt and today's consumer?

Andy Wang , Managing Partner at Runnymede Capital Management, Inc.