Consumers are tapping cards, but credit growth is slowing
We may be seeing a tipping point for debt – where gains in personal loan borrowing come at the expense of more expensive credit card debt.
It’s a change that also signals consumers are refocusing on controlling their monthly spending can Control.
The US Federal Reserve released its latest data on consumer borrowing on Monday (Nov. 7) and the pace slowed, particularly for credit card debt.
For the month of September Total revolving credit was $1.162 trillion, up 8.7% year over year and down from the double-digit annual percentage gains that characterized previous months.
Digging down a little, the answer to why might be clear: Commercial bank interest rates were at 16.3% on credit card loans, up from 14.5% in the third quarter of 2021. The Fed’s data was a bit tastier on loans, where the average interest rate on a 24-month loan was 10.2%, although this too is up from 9.4% in the third quarter of 2021.
The key takeaways are that the pace is slowing even as monthly obligations are rising, and triangulating the Fed’s data with PYMNTS’ own research could provide clues as to why. The majority of us live paycheck to paycheck – more than 60% of us do this and 55% of us have done it limited purchasing power, and it makes sense that there would be more prudent management of budgetary commitments.
Also consider that other PYMNTS reports have shown this Paycheck-to-paycheck consumers are three times as likely Revolve credit card debt and run higher overall monthly balances. Among cardholders who live paycheck to paycheck, 34% of those who have no trouble paying monthly bills and 47% of those who have trouble paying their bills “always” or “usually” have a revolving balance . Only 12% of consumers don’t “always” or “usually” live from paycheck to paycheck.
So the bulk of this credit card debt is borne by consumers who have taken on revolving debt and are increasingly challenged by that debt.
As highlighted in this space, as earnings season progresses, companies, including Discover announce that crime rates have increased. In the company’s supplements and earnings results released last week, the credit card’s 30-day delinquency rate was 2.1% last quarter, up from 1.8% in the second quarter of this year and 1.5% last year.
Increasingly, debt consolidation and lower interest rates on that debt (as reflected in the Fed data mentioned above) are proving attractive. Discover management said on the earnings call that on-the-book personal loans were up 11.4% year over year and 7.4% quarter over quarter to $7.7 billion. As CEO Robert Hochschild said on a call, “A rising interest rate environment is creating a strong focus on debt consolidation, which is the primary use of our personal loans.” Loan growth is expected to be in the high teens.
Lending Club CEO Scott Sanborn said at the latest earnings call last month that “the majority of our members come to us to consolidate credit card debt” as quarterly lending is up 14% year-on-year, noting that “the impact of the earliest Fed rate Increases are showing up on their credit card statements, with card rates and balances at record highs, and with more increases on the horizon.” He added that “our fixed-rate, perpetual loans continue to be a highly attractive way for consumers to save money.”
The Fed’s data only underscores that while consumers are still spending, caution is needed — literally.
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