US household finances have reached a milestone by accumulating $1 trillion in credit card debt, which comes with an average interest rate of 20.6%. When combined with shrinking personal savings and elevated consumer prices, many economists are worried that debt-laden consumers won’t have the buying power to keep powering the economy through the rest of the year. I find those conclusions to be overly pessimistic.
Rising credit card debt is, generally, neither a bad thing for the economy nor a sign of trouble among consumers. It seems the knee-jerk reaction to the latest data has been to assume households are stressed, turning to their credit cards for funds because they are strapped for cash or otherwise suffering under the weight of inflation. The reality, though, is that credit card debt tracks the business cycle, rising as the economy expands and shrinking as it contracts — just like business investment.
An alternative view is that households use credit cards primarily to fund larger ticket purchases of longer-lasting goods and services. Under this view, credit-card purchases are almost like a form of investment, and consumers usually only make such purchases when they are feeling confident about their personal financial situation. And let’s not forget that the unemployment rate has been at 4% or below since the start of 2022, with wages expanding at a faster rate than the pre-pandemic pace.
Indeed, this is precisely what we see in the data. Year-over-year growth in total credit card balances peaked in the first quarter of 2008, just as the economy was entering recession, and turned negative in 2009, not turning positive again until the recovery was well underway in 2014. Over the last several quarters, credit card debt accumulation has risen, consistent with an economy that seems to be gaining steam. Economists have steadily increased their forecasts on how much gross domestic product will grow in 2023, increasing them from a median of 0.3% at the start of the year to 2% currently, according to data compiled by Bloomberg.