Despite better economy, average consumer debt rises near ‘tipping point’

CardHub reports consumers racked up $32.1 billion in new credit card balances during the second quarter ending June 30. Not only is this the largest second-quarter binge since the study began in 2009, but it also erased the entire first quarter debt reduction.

This increased use of credit puts the nation on pace to end the year with as much as $60 billion in added credit card debt, noted CardHub CEO Odysseas Papadimitriou in this report. He said credit card debt statistics, in particular, reflect consumer sentiment and can foretell overleveraging bubbles that may trigger constriction in credit markets going forward.

In the first quarter of this year consumers repaid nearly $35 billion in credit card debt, a move Papadimitriou said showed promise, only to be undone with the spending spree recently recorded. His concern is the recent spending could put the nation close to a tipping point at which balances become unsustainable and delinquency rates skyrocket.

“With the global economy showing signs of extreme volatility and debate raging over both the timing and frequency of Federal Reserve rate hikes, data that speaks to the financial health of the average American household can be quite telling,” noted the CardHub report. “Credit card debt statistics, in particular, reflect consumer sentiment and can foretell overleveraging bubbles that may trigger constriction in credit markets.”

CardHub expects outstanding credit card debt to cross $900 billion by the end of the year, bringing the average indebted household’s balance to $7,813 – the highest amount since the Great Recession, and $615 below the tipping point CardHub identified as being unsustainable.

One of the reasons behind increased credit card use is lower fuel prices have given consumers the confidence and ability to make purchases they have delayed for years.

"Increased consumer confidence has led to overspending. Instead of saving that extra cash or putting toward existing debt, families are finally making the purchases they've been waiting on for years,” CardHub told The City Wire. “A booming housing marketin many cities combined with the looming rate hikes have made this past quarter an attractive time to buy, as well as historically low new car financing deals that have been luring record numbers of consumers to the lots. Apart from mortgages and auto loans, those big purchases comes with a variety of expenses, both big and small, that credit cards are catching."

While credit card debt levels are trending significantly upward, charge-off rates remain near historical lows and are, in fact, down on a year-over-year basis. Something clearly has to give, and it does not seem to be consumer spending habits, Papadimitriou noted.

On Tuesday (Sept. 8) the Federal Reserve reported outstanding consumer credit rose $19.1 billion, or at 6.7%, in July. Overall consumer credit has now climbed each month for nearly four years. Wall Street economists were close with their consensus expectation a $19.5 billion increase in July.

The Fed report indicated that revolving credit, which is mostly credit cards ($4.3 billion) increased 5.7% annually in July. That was down from the 10% rise reported in June. Non-revolving credit, which consists of auto and student loans, rose $14.8 billion, or 7% in July, this compared to a 9.4% jump in June.

Economists say increased consumer borrowing is the latest evidence the U.S. economy is on track for a healthy pace in the back half of this year. Consistent job gains are helping to support the additional spending levels. The U.S. economy grew at an annual rate of 3.7% in the April to June quarter. This was a welcome improvement from the 0.6% increase in the first quarter. Economists expect the growth will average around 3% in the third and fourth quarters.

CreditCards.com, an online credit card marketplace, reports that 13.5% of people who applied for a credit card in June were turned down, down from 20.2% declined in the same month last year. Credit card users who requested higher spending limits in June also had better luck with 17% reporting rejection compared to a 33% rejection rate in June 2014.

While there are more card issuers granting credit, the card limits are not as high as they used to be, according to CreditCard.com. Experian reports that credit card limits declined 8.8% or $220 from a year ago for consumers with near prime credit. Those with deep subprime credit saw their spending limits reduced 25% or $177.