(Mike Maharrey, Money Metals News Service) American consumers continued to pile on debt in January, but at a moderating pace after the massive credit-card fueled spending spree for the holidays.
Retail sales fell by 0.9 percent in January, and this was reflected in the slowdown in the growth of consumer debt. However, Americans are still leaning on debt to make ends meet.
It remains unclear how long it will take for consumers to hit their credit limit, but one thing is certain – that time will come and it’s growing near. That’s bad news for an economy that depends on consumer borrowing and spending for most of its growth.
Total consumer debt grew by 18.5 billion in January, a 4.3 percent increase, according to the latest data from the Federal Reserve.
That pushed total consumer debt to over $5 trillion for the first time.
The Federal Reserve consumer debt figures include credit card debt, student loans, and auto loans but do not factor in mortgage debt. When you include mortgages, U.S. households are buried under a record level of debt. As of the end of 2024, total household debt stood at $18.4 trillion.
Revolving credit, primarily reflecting credit card debt, grew by $9 billion, an 8.2 percent increase.
Americans currently owe a record $1.33 trillion in revolving debt.
The double whammy of rising debt and interest rates exacerbates the debt problem. The average annual percentage rate (APR) currently stands at 20.09 percent, with some companies still charging rates as high as 28 percent. The average is only slightly down from the record high of 20.79 percent set in August.
Rates aren’t coming down much even with Federal Reserve rate cuts. According to an ABC News report, despite a full percentage point in rate cuts, credit card companies are charging a higher margin “to weather default risk, cover overhead costs and recoup profits, experts added.”
“Credit card rates are high, and they’re staying high,” Bankrate analyst Ted Rossman told ABC News.
The Fed’s recent pause in rate cuts is more bad news for consumers buried in debt.
Americans are starting to struggle to pay those high credit card bills.
According to the New York Fed in the fourth quarter of 2024, “Aggregate delinquency rates ticked up 0.1 percentage point (ppt) from the previous quarter to 3.6 percent of outstanding debt in some stage of delinquency.”
According to PYMNTS Intelligence, credit cards are the loan type with the highest share of balance 90+ days delinquent, currently at 11.5 percent.
As traditional credit avenues creep closer to their limits, it appears consumers are turning to buy-now-pay-later to keep spending. According to PYMNTS, “The torrid pace of activity at the likes of Sezzle and Affirm — as many categories saw double-digit spending (and Sezzle notched triple-digit revenue growth) — has far outstripped the growth in the Fed’s data.”
Subprime credit card borrowers are struggling the most, with delinquency rates nudging upward by about 5.6 percent since the Federal Reserve began raising rates to battle price inflation.
Despite strong retail spending in December for the holiday season, the bigger picture reveals a consumer under stress.
Non-revolving debt, primarily reflecting outstanding auto loans, student loans, and loans for other big-ticket durable goods, also increased about $9 trillion, a 3 percent increase. This was a significant slowdown from the 5.2 percent in December and is more in line with the tepid growth of around 2 percent in non-revolving credit over the last year as consumers cut back on big-ticket spending to cover the increasing costs of day-to-day necessities.
Americans have blown through the savings they accumulated during the pandemic and have run their credit cards close to the limit. An economy run on Visa and Mastercard simply isn’t sustainable. When the Americans do hit their credit limit, it will have major implications for economic growth.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
