Personal finance journalist with an eye for industry news
Card balances bounced back up in April after a brief slump, according to a federal government report released Thursday.
Consumer revolving debt, which is mostly credit card balances, rose by $2.2 billion on a seasonally adjusted basis to $1.03 trillion, per the Federal Reserve’s G.19 consumer credit report. The annualized growth rate was 2.6 percent.
April’s increase came after card balances fell slightly in March, just two months after revolving debt reached an all-time high of $1.03 trillion. The brief downward trend could be attributed to the typical post-holiday lull in consumer spending, which grew by only 0.2 percent on average from January to March, per data from the federal government.
“It’s fairly consistent with household spending cooling off in the first quarter,” said Brittany Kleinpaste, vice president of economic policy and research at the American Bankers Association (ABA). “There’s a trend of the first quarter being weaker than the rest of the year.”
Total consumer debt, which includes for student and car loans in addition to card balances, increased by $9.2 billion to $3.88 trillion – an annualized growth rate of 2.9 percent.
Card industry’s glory days coming to an end?
The first quarter of 2018 brought warning signs that the credit card industry’s recent boom period may be on the wane. A report last month in the Wall Street Journal noted that card balance growth had slowed in March 2018 compared to last year as banks tightened underwriting standards.
There is also evidence some consumers are struggling to pay their card balances, despite sustained strength in the economy. Net charge-offs reported by large issuers reached a five-year high in the first quarter of 2018, per Fitch Ratings.
Meanwhile, the New York Fed reported in May the 90-day credit card delinquency rate had risen half a percentage point to 8 percent as of March 31. And statistics from Equifax showed the 60-day delinquency rate on retail cards rose to its highest level since 2011 in March.
But lower card balance growth and higher rates of missed payments don’t necessarily indicate that the credit market is about to crater.
ABA’s Kleinpaste said the sweeping tax reform bill signed into law last December may have dampened the need to borrow for many consumers in the first months of this year.
“If they’re seeing increased cash into their bank accounts, they may be likely to take on less credit,” she said.
Kleinpaste also noted that delinquency rates on bank-issued credit cards are still well below 15-year lows, though they occasionally tick upward.
Additionally, consumer spending appears to be on the rebound. Personal expenditure rose by 0.6 percent in April, right behind a 0.5 percent increase in March, according to the federal government.
New rate hike coming in June
All indications are the Fed will raise its benchmark federal funds rate by a quarter percentage point at its next Federal Open Market Committee meeting June 12-13. It would be the seventh rate hike since December 2015 and the second this year.
The Fed currently forecasts three total rate hikes for 2018, but it could shift to a more aggressive timeline based on the outlook for inflation and other economic indicators such as GDP, wage growth and job gains. The economy grew by only 2.2 percent in the first quarter of 2018, but it has added an average of about 200,000 jobs per month so far this year.
“Unless derailed by international shocks \u2026 the Federal Reserve is likely to proceed with rate hikes in June, September and December,” said Lynn Reaser, chief economist at Point Loma Nazarene University. “The U.S. economy appears likely to rebound from a relatively weak first quarter and inflation appears to have firmed.”
However, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in a May 23 report that the Fed’s policymakers’ views differ on what the neutral funds rate – defined as the rate consistent with full employment and stable prices – should be. That suggests rate hikes may continue at a relatively deliberate pace.
“For now, there’s broad agreement that the \u2018gradual’ normalization can continue,” Shepherdson wrote. “Participants are watching the wage numbers closely, but evidence of a broad acceleration remains scant.”
Credit card APRs have generally moved in parallel with federal funds rate increases. The average APR for new card accounts is 16.73, according to the CreditCards.com Weekly Credit Card Rate Report.