Americans are piling on credit card debt at record levels that we haven’t seen since the financial crisis.
This suggests that much of the US is actually struggling financially, because people are substituting credit for income they no longer have.
Households added $21.9 billion in credit card debt in the third quarter — the largest increase for that period since 2007 — bringing the amount of outstanding credit card debt to $927.1 billion, according to the latest study from WalletHub. That matches the mark in 2007 before the recession began, and it’s the highest tally since the end of 2008, when the global economy was experiencing a full-on implosion.
Racking up credit card debt isn’t inherently bad, so long as it’s being paid back. And so far, Americans are defaulting on their credit card debt at near historically low levels. Charge-off rates — the percentage of credit card debt that the companies are unable to collect on — are only at 2.86%, compared with 3.95% in 2007 the quarter before the Great Recession began, and in excess of 10% in the years following the crisis.
“I think it is a cause of concern because it says consumers are struggling despite the low unemployment figures,” says Lucia Dunn, an economics professor at Ohio State University. “I think the rise in debt arises from weakness in the economy. People whose incomes have dropped may be trying to maintain an older level of consumption by just charging everything.” WalletHub
This behavior is not unlike what Dunn saw during the Great Recession, when she was monitoring and researching consumer debt data.
“Credit card (debt) shrank in some sectors because people had their accounts closed. But for our sample who maintained a credit card, credit card debt actually rose. People substituted credit for income,” Dunn says.
Why would Americans be struggling when unemployment is so low? Well, having a job and having a well-paying job are two different things. And wages have largely remained stagnant in the 21st century.
Andy Kiersz/Business Insider
So far, Americans are managing to balance their increased credit load without much calamity. But if the trend continues, and defaults start to rise, the American economy could easily get pretty ugly.
[From an article by Alex Morrell, published by BUSINESS INSIDER]
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NORM ‘n’ AL, Minneapolis