U.S. credit card balances, swollen by eager holiday shoppers and rising inflation, increased at a faster clip late last year than at any point during the last two decades.
Outstanding card loans rose by $52 billion in the fourth quarter, the largest increase in the 22 years that the metric has been tracked, according to a report Tuesday by the Federal Reserve Bank of New York.
The most recent quarterly increase in credit card debt is larger than those that occurred after the financial crisis of 2007 to 2009, but they fit the same general pattern, said Ted Rossman, senior industry analyst at Bankrate.
“We’ve seen this movie before,” Rossman said in a written statement. “Credit card debt often falls during and shortly after a recession, but then it rockets to new highs.”
The rise in card balances is welcome news for banks that earlier in the pandemic reported sharp reductions in consumer borrowing. The curtailed borrowing was driven in large part by a variety of temporary factors, including government stimulus programs that provided extra cash to consumers, a pause on federal student loan payments and reduced consumer spending as a result of the lockdowns in 2020.
At the end of last year, credit card debt carried by U.S. households totaled about $860 billion, which was down about 7% from the end of 2019, according to the report released Tuesday. But the New York Fed researchers said the earlier mark could be passed later this year.
The researchers warned that the coming rise in interest rates will have certain adverse effects on consumers, since many credit cards feature variable rates. Consumers face the prospect of higher borrowing costs, and the number of borrowers who are delinquent on their monthly payments may start to swell.
“They will face cash-flow pressures fairly soon as interest rates start to rise,” one New York Fed researcher said during a call with reporters.
The New York Fed’s finding that card borrowing increased sharply during the fourth quarter is consistent with recent disclosures by banks.
Bank of America said Monday that credit card spending was 28% higher in January than it was during the same month last year.
“Bank of America consumer clients continued their strong payment trends in January, following record levels in 2021,” Mary Hines Droesch, head of consumer and small business products at BofA, said in a press release.
Citigroup’s branded card spending increased 24% in the fourth quarter, and broader retail card spending volume at the megabank rose by 16%.
Citi executives said last month that consumers have so far been diligent about paying off their balances — a pattern that can dent a bank’s interest income. The New York bank will be watching to see how long that trend continues, as consumer spending continues to grow and the effects of government stimulus programs wear off.
“For cards, it's really going to be about payment rates and how they taper off — hopefully taper off,” Citi Chief Financial Officer Mark Mason said during a Jan. 14 call with analysts. “They've been stubbornly high through all of 2021.”
Credit cards are not the only part of the consumer finance industry where loan balances are rising.
Mortgage balances increased $258 billion in the fourth quarter, and auto loan balances climbed by $15 billion. All told, total household debt rose by $1 trillion in 2021 — the largest increase in nominal terms since 2007, according to the New York Fed.
The New York Fed’s researchers questioned how long consumers can chase the pace of price hikes, especially at car dealerships.
“The price of new and used cars cannot rise relative to income forever,” one of the researchers said.
