A Trillion in Credit Card Debt Doesn’t Mean Consumers Are Tapped

Nothing attracts eyeballs like a big round number, and headlines sure made hay with one this week: Credit card balances now top $1 trillion for the first time ever, per a New York Fed report. Unsurprisingly, this raised the alarm about inflation forcing consumers to ratchet up personal debt to keep spending, implying tapped-out consumers will soon pose big economic headwinds. Yet as with all big numbers, it is important to scale and consider context. Do so with credit card debt, and it becomes clear this isn’t a big economic risk that jeopardizes this bull market.

It is easy to get hung up on the sheer size of credit card debt, much as people do with US public debt. But as with US public debt, the total amount outstanding is meaningless. What matters more is how big it is relative to society’s ability to keep servicing debt. With credit card debt, there are a few ways to look at this. Exhibit 1 shows two: credit card debt as percentages of GDP and after-tax personal income. Since credit card debt isn’t adjusted for inflation, we used nominal GDP and nominal income to keep like with like.

As you will see, debt was far higher for most of the last 20 years, and the recent uptick just brings things back to prepandemic norms. Turns out that while inflation lifted consumer debt as prices rose, it also inflated (sorry) incomes and total output.

Exhibit 1: Scaling Credit Card Debt, Take One

Source: New York Fed and US Bureau of Economic Analysis, as of 8/9/2023.

Then again, this measure suffers the same flaw as comparing government debt to GDP: It is a stock/flow mismatch. That is, debt is a stock measure—total amount accumulated. GDP and income, by contrast, are flows—the amount of activity in a set period. So let us compare credit card debt to another stock: total deposits. Here, too, credit card balances remain near generational lows on a relative basis.

Exhibit 2: Scaling Credit Card Debt, Take Two

Source: New York Fed and St. Louis Fed, as of 8/9/2023.

If credit card debt didn’t break consumers or the US economy when it topped 7% of disposable income, 5% of GDP and 14% of deposits, we doubt it is a massive negative now at 5.2%, 3.8% and 6.0%, respectively.^[i]

Here, you might respond with yah, but personal income and deposits are boosted by high-income households, and lower-income folks tend to own credit card debt. Fair enough, although as The Washington Post’s Michelle Singletary explored at length Tuesday, high-income households tend to carry more credit card debt than people think.^[ii] Yet we actually have a very easy way to see if households are buckling under heavy credit card debt: delinquencies. Enter Exhibit 3, which shows the percentage of credit card balances that are 90+ days delinquent. That figure is currently 8.0%, in line with prepandemic levels and below the norm before 2007 – 2009’s global financial crisis. Speaking of which, that period is also a timely reminder that consumer debt difficulties tend to follow, rather than cause, tough economic times.

Exhibit 3: Delinquency Ratios Are Benign

Source: New York Fed, as of 8/9/2023.

Yet if this week’s headlines are any indication, people think credit card debt is about to cause tough economic times, keeping expectations and sentiment low. Great. That lowers the bar reality needs to clear to continue delivering positive surprise and propelling stocks up this bull market’s wall of worry.