Personal finance journalist with an eye for industry news
Card balances set a new all-time record in January, according to a federal government report released Wednesday.
Consumer revolving debt, which is mostly credit card balances, rose by $700 million on a seasonally adjusted basis to $1.03 trillion, per the Federal Reserve’s G.19 consumer credit report. The annualized growth rate was 0.8 percent.
The increase came two months after U.S. consumers surpassed a 9-year-old record for revolving debt. Card balances reached $1.02 trillion in April 2008, but they began to steadily decrease as the Great Recession took hold, eventually bottoming out at $833 billion in April 2011. Revolving debt returned to pre-recession levels in September 2017, when it reached $1 trillion.
Total consumer debt, which includes student and auto loans as well as revolving debt, increased by $13.9 billion to $3.86 trillion – an annualized growth rate of 4.3 percent.
Card market is stable, despite small banks’ losses
The year in which consumers set a new all-time record for card balances ended with small but steady rises in missed payments and average balances per cardholder. The serious delinquency rate rose from 1.79 percent in the fourth quarter of 2016 to 1.87 percent in the last quarter of 2017, and average debt per borrower rose by $158 to $5,644, according to TransUnion’s Q4 2017 Industry Insights Report.
But experts still don’t fear a credit bubble burst, given continued economic strength and a shift by card issuers away from higher-risk customers. Account originations and average new account credit lines fell year-over-year in the fourth quarter of 2017, due in part to tighter underwriting standards.
“Overall, consumers are keeping up with their payments and are maintaining a healthy relationship with their debt,” said Matt Komos, vice president of research and consulting at TransUnion.
However, the outlook is less rosy for small banks, which saw a spike in charge-offs late last year. Small banks’ credit card charge-off rate jumped from 4.7 percent to a seven-year high of 7.9 percent in the third quarter, falling to 7.17 percent in the fourth quarter, per Federal Reserve data. That compares to a 3.5 percent fourth quarter charge-off rate for large banks, which is well below a recession-era high of 10.6 percent in 2009.
Consumers pull back on spending after post-storm surge
Meanwhile, consumers started off the new year earning more and spending less. Personal income rose 0.4 percent in January, while inflation-adjusted spending fell by 0.1 percent. TD Economics Senior Economist James Marple noted in a March 1 report that the spending weakness was due in part to “give back” after a surge in buying that followed last year’s hurricanes. But it also follows a pattern of seasonally adjusted spending decreases at the beginning of 2016 and 2017.
“We are not concerned with the apparent setback, which is likely to prove short lived,” Marple wrote. “With both tax cuts and a tightening labor market likely to push up income, household demand is expected to accelerate enough to pull growth to an above-trend rate over the remainder of 2018.”
Fed’s Powell bullish on economy, rate hike expected this month
All signs point to a new quarter-point interest rate hike at the Federal Open Market Committee’s meeting later this month. The Fed’s latest forecast calls for three rate hikes in 2018, but some analysts think four could be in the offing based on recent signals from officials.
In a February congressional hearing, newly minted Fed Chairman Jerome Powell expressed optimism over economic growth and the gradual rise of inflation to the Fed’s 2 percent target. He noted sustained strength in the labor market – the unemployment rate stood at 4.1 percent as of January, and job gains are expected to average about 160,000 per month this year.
But not all are convinced that Powell and the Fed will embark on a more aggressive rate hike push this year. Pantheon Macroeconomics Chief Economist Ian Shepherdson noted in a Feb. 28 report that with wage gains still hovering below 3 percent and productivity growth picking up, inflation may be more likely to hit the Fed’s target in 2019 rather than this year.
“We think it’s too soon to expect the Fed to introduce a fourth hike to the base-case forecast this year, but Mr. Powell very clearly left the door open,” Shepherdson wrote.
A rate hike in March would be the sixth since December 2015, when then-Fed Chair Janet Yellen began normalizing rates amid post-recession recovery. Average credit card APRs have risen in tandem with the Fed’s adjustments, reaching an all-time high of 16.41 percent in early February, according to the CreditCards.com Weekly Credit Card Rate Report.
See related: Fed: Card balances rose by $5.1 billion in December