Unprecedented Decline in Credit Card Debt Coincides with Record High Card APRs

Global Carry Trade and the US Economy

The Bank of Japan's recent attempt to revive the global carry trade by reversing Japan's ill-timed venture into rate hikes has been unsuccessful, with stocks plummeting. This is due to renewed fears about the slowing US economy. To add fuel to the fire, the Federal Reserve's June consumer credit data, which was recently released, confirms that consumer spending has hit a wall.

Federal Reserve's Monthly Consumer Credit Report

The Federal Reserve's monthly consumer credit report for June shows that total consumer credit only increased by $8.9 billion, falling short of the median estimate of $10 billion. This is a significant decrease from the revised May figure of $13.9 billion. While the total number isn't shocking, it does confirm the recent downward trend, which usually indicates economic contraction. Without credit, US consumers simply can't spend. The composition of the credit was a big surprise.

Non-Revolving Credit and Revolving Credit

Non-revolving credit, which includes student and auto loans, increased by $10.6 billion. This is the largest monthly increase since last June. However, a deeper look reveals that this increase was solely due to student loans, which are being repaid again after the end of the Biden repayment moratorium in late 2023. Car loans, which are crucial for the US automotive industry, have stagnated. On the other hand, revolving credit, or credit card debt, took a surprising turn. In June, revolving credit fell by a staggering $1.7 billion, the largest drop since the Covid collapse. This is concerning, as a significant decrease in this category often precedes or indicates an economic disaster.

Average Interest Rate on Credit Card Accounts

The Federal Reserve's refusal to cut rates is a likely cause for the drastic slowdown in new credit card debt. In Q2, the average interest rate on interest-bearing credit card accounts reached a new record high of 22.76%. This serves as a stark reminder that banks are quick to increase credit card rates but rarely reduce them.

Personal Savings Rate and Credit Card Debt

With the personal savings rate in the US plummeting from over 5% to 3.4% in just a few months, consumers are increasingly strapped for cash and equity. This means that there is a limit to how much more credit card debt can be accrued before reality sets in. The most alarming statistic is that total credit card debt is at an all-time high, while the personal savings rate is at a record low.

Upcoming Election and Credit Card Spending

With an election approaching, it wouldn't be surprising if the White House encourages credit-card fueled spending and instructs banks to overlook rising delinquency and charge-off rates. However, this could lead to a harsh reality check on the first day of the new presidency.

Bottom Line

The recent decline in credit card debt and the simultaneous rise in card APRs is a cause for concern. The question is, will this trend continue, and what impact will it have on the economy? We'd love to hear your thoughts on this matter. Please share this article with your friends and join us for the Daily Briefing, every day at 6pm.