By Ray Birch
MIAMI—Consumers have been on a credit card “spending spree” in 2023, according to one analyst, who is predicting that pace may be sustainable in 2024 but certainly will not be in 2025 when the market could be “headed for trouble.”
Indeed, credit unions will want to pay attention as Americans are on a path toward one of the largest debt increases the U.S. has ever seen, according to WalletHub CEO Odysseas Papadimitriou.
Papadimitriou told CUToday.info consumers have rebounded from the credit respite brought on by the pandemic, and now have their foot on the credit gas pedal. But it’s a race toward an unsustainable debt level that will drive up delinquencies and charge-offs, he said.
As CUToday.info has reported, consumer credit card debt has hit record levels, with a new report on household debt from the Federal Reserve Bank of New York finding total credit card debt rose nearly 5%, or about $45 billion, in the second quarter to a new high of $1.03 trillion.
Papadimitriou emphasized the current trend line actually isn’t as bad as it looks, as the spending totals require some adjusting.
Hold On Just a Minute
“When you account for the massive impact inflation has on balances, as well as the fact that debt-to-deposit levels are roughly 50% below the peak, U.S. households are actually in a lot better shape financially than it seems at first glance,” Papadimitriou said. “Inflation is masking the fact that people are actually managing their debt better than they have in the past.”
Regardless, the pace of spending and the drawdown of savings accumulated during the pandemic are combining to create future problems, he said.
“Our forecast at WalletHub is for U.S. consumers to add $150 billion in card debt to their total by the end of this year,” Papadimitriou said.
‘Biggest We Have Ever Seen’
But that isn’t all, as WalletHub is further predicting consumers will pile another $150 billion on top of their 2023 total during 2024.
“It will be on the magnitude of the biggest debt increases we have ever seen,” he said. “For example, let's look at 2019. That year we saw a $60 billion increase over 2018. If the increases remain at their current pace going into 2025, if the unemployment rate also goes up, we are headed for trouble.”
Odysseas Papadimitriou
Papadimitriou said that one of the few things he sees ahead that could tamp down consumers’ appetite for spending on credit would be a new spike in inflation.
“That could spook some people,” Papadimitriou said. “Also, if more companies require workers to go back into the office, that will increase expenses for people. Those are the things that could change the equation. But the Fed has been very careful about not making any bold moves, so they're always erring on the side of inflation.”
‘Steadily Increasing’
Consumer finances have improved, but Papadimitriou said it’s a fragile improvement.
“As we know, during the pandemic we reached record-low debt levels, and we have been steadily increasing them since,” Papadimitriou said. “And, inflation has been eating into people’s savings. Yet, we're still at even healthier debt levels than we were before the pandemic. During the pandemic people were able to save a lot of money. We're making more following the pandemic than we did before. That really helped and improve the balance sheet of the American household.”
Papadimitriou is not confident consumers have learned their lessons from prior periods when debt levels hit unsustainable levels.
“I think as consumers we have a short-term memory,” he said. “The mistakes of the past are going to be repeated and, unfortunately, that is why the spending party is going to continue.”
Papadimitriou said he has not seen any indications the major card issuers are tightening standards in preparation for a big spike in delinquencies, even as a number of big banks have recently reporting a rise in delinquencies. The same holds true for credit unions, with NCUA recently cautioning CUs to keep an eye on their portfolios.
Sky Isn’t Falling--Yet
“Maybe a year and a half ago issuers started getting really scared when the Fed started raising interest rates and they were thinking unemployment was going to rise drastically. And at the same time the stock market was going down,” he said. “So, a bunch of them got really scared and tightened. Since then, they realized that the sky is not falling and they have come back into the market and have loosened standards.
“You know, when the pandemic hit everyone thought we were headed for huge credit problems, but as it turned out the pandemic was one of the best things ever for credit,” Papadimitriou noted.