By Robert L. Cain, Copyright 2023, Cain Publications. Inc.
When will it end? Credit card debt just hit a record high, jumping $60 billion to almost a trillion dollars, $986.5 billion, in the three months ending December 2022. That goes along with interest rates increasing on that debt, sucking the savings rate people accomplished during the pandemic down to 3.4% from 33%.
That goes along with a jump in household debt of 2.4 percent to almost $17 trillion over the last
three months of 2022 while average credit card rates increased to 21.6 percent, up from 14.5 percent in November 2022 or just 12 percent in August 2012.
The money is running out. Greg Daco, chief economist at EY-Parthenon, wrote in a market commentary on February 22, “for lower-income families, their excess savings have vanished, and they are now dipping into their regular savings and using credit to offset the burden of inflation.”
“They’re out of cash,” Mark Zandi an economist for Moody’s Analytics, said, “They’re turning to debt to try to supplement their income, and they having trouble paying down that debt.”
Greg Daco said in an interview with Vox, “We’re seeing not just an increase in the transitions into delinquency but also an increase in the debt servicing costs because of higher interest rates and because the levels of leverage are rising. And then we’re also seeing banks and financial institutions being more cautious with credit.” Delinquencies will rise and the economy will at least shudder and at worst go into recession, how severely, we can’t predict. Too many factors enter into the picture.
The reason the economy hasn’t crashed and burned under the weight of that debt is that almost no one who wants to work is unemployed. Most people can still make the minimum payments on their credit cards, keeping their FICO score tolerable.
Adding to that we have the monkey wrenches waiting to be hurled into the economic machines: student loans. Some student loan borrowers have never had to make a payment nor been expected to. Those who graduated with student loan debt in 2020, for example, got a reprieve from both Donald Trump and Joe Biden who put the payment moratoriums put in place.
Because they didn’t have to pay on their student loans, millions of people who had borrowed lots of money to go to school, more than $20,000, got pandemic cash in addition to their salaries and could spend all that money on something other than paying down student loans. Now they wait. The moratorium, extended eight times, may be ending and threatening to make them start paying again, possibly as soon as August.
Thus, that money they’d been using to pay the rent, their car payments, and maybe stash away a little, will need to be used for that debt they ran up in student loans plus their credit cards, car payment, not to mention regular living expenses.
Their hope is that at least some of their debt will be forgiven. Maybe, but probably not. The Supreme Court has heard arguments against that debt forgiveness and may toss the whole notion of debt forgiveness, squashing any hope of relief for borrowers with government-backed loans. Maybe the moratorium will be continued, and maybe not. At some point, though, the payments will come due. That student-loan debt of $1.75 trillion will have to begin to be paid, month by month, eating into the incomes of people, some of whom have never had to pay a dime on their loans, and those who have gotten used to not making payments.
Betsy Mayotte of the Institute of Student Loan Advisors tells those folks to avoid spending money. But when they don’t spend money, that affects national consumer spending, $14.227 trillion in the third quarter of 2022. Lots of that spending came from credit card sales, those same sales that jumped the debt $60 billion to $986.5 billion.
Ending the moratorium can make living more precarious for those whose incomes barely cover their expenses now. Already many lower-income people have to use their credit cards just to live, unable to pay them fully at the end of the month. They have to charge highly inflated food to eat and pay for gas to get to work, then have a card balance at the end of the month on which they hope they can make the minimum payment. Add the student loan payments to the mix and creditors, utilities, or landlords, or all three, will not get paid.
What happens when rent, credit card bills, and car payments don’t get made? In a couple of months, debtors won’t have a place to live, won’t have use of their credit cards anymore, or a car to drive in a few months. Exacerbating the problem: 202 Million new credit accounts opened in the fourth quarter of 2022 mostly from adults 18 to 25 including subprime customers who have FICO scores 600 or lower. Credit card companies have begun marketing to these less-than-prime credit candidates. Figure, as does Transunion, that delinquency rates will grow.
Incomes haven’t kept pace with inflation. Clarify Capital, a small business lender reported that in the United States, even though the average annual salary increased 31.2 percent from 2010 to May 2021, the average incomes adjusted for inflation dropped 4.5 percent. The labor department keeps saying how consumer spending is great and how it’s pushing the economy upward. But they only mention the raw figures. Never do they factor in how inflation has eaten up the purchasing power of consumers, forcing them to rely on credit cards that eventually they could max out and be unable to make even minimum payments on.
As the delinquencies begin to grow, the ripple will start affecting businesses that won’t have those previously great sales figures propped up by credit sales and negatively affecting the credit card companies that will lose money writing off debts.
Debt crisis? It’s gathering steam, fed by rising prices, stagnant to declining incomes, and late payments. Those with a vested interest in evading the facts say “not yet.” But the signs all foretell a debt debacle.