Amid the recent optimism about the economy and record-setting stock market performance comes a harsh dose of reality. Consumers are becoming more deeply mired in high-interest credit card debt.
The personal finance site WalletHub points to a trifecta of ominous statistics. Consumers racked up a record $21.9 billion in new credit card debt in the third quarter, the largest increase since 2007; the second quarter of the year saw a record $34.4 billion in new credit card debt in the second quarter; and the first quarter of the year saw the smallest pay-down in credit card debt since 2008.
“So it is not a question of whether consumers are weakening financially, but rather how long this trend toward pre-recession habits will last and just how bad it will get,” the authors write. “Unfortunately, the immediate forecast does not appear too bright.”
WalletHub estimates 2016 will end with a net increase of about $80 billion in credit card debt. Should that happen, outstanding balances within striking distance of 2008’s all-time record high, with the average indebted household owning around $8,380.
Bad things can happen
Credit card debt is not necessarily a bad thing, as long as consumers can pay it off. When they can't, bad things happen. WalletHub worries consumers now owe credit card companies almost as much as they did just before the start of the Great Recession.
Since wages and incomes have been fairly stagnant over the last 10 years, it's difficult to see how consumers will be able to handle a growth in expensive debt on this scale. The study authors suggest that consumers have reverted to “pre-downturn bad habits.”
When a consumer defaults on his or her credit card bill, the lender “charges off” the unpaid balance. Currently, WalletHub reports the charge off rate remains very low. But that, it says, is fueling credit card companies' appetites to extend credit.