Credit Card Debt Soars, Yet Delinquencies Fall
Two reports released yesterday showed how healthy the economy is for credit card issuers.
Credit card debt posted its largest increase in a year, a sign that consumers may be more optimistic about their personal finances. In addition, American households may be using their credit cards more prudently, paying back their loans in a more timely fashion.
According to the Federal Reserve monthly data, revolving credit, made up mostly of credit card debt, jumped a surprising $6.6 billion from $849.9 billion in April to $856.5 billion in May. This was an annualized increase of 9.3%, the largest annualized increase since May 2012.
However, the delinquency rate on credit cards is at the lowest point since 1990. The American Bankers Association reported the delinquency rate–credit card payments more than 30 days late–dropped to 2.41%.
After the financial crash in 2008, the delinquency rate hit a high of 5%. Credit card issuers froze credit and wrote off bad debt. Consumers limited their credit card usage and focused on paying down debt. As a result, the delinquency rate dropped somewhat steadily for the last five years to today’s lows. Banks kept the strict lending practices and still avoid risky loans while many consumers have made paying down debt a financial habit.
This delicate balance could be disrupted by a possible rise in interest rates. Rates for mortgage loans and student loans are increasing while credit card rates, at this point, remain steady. But most credit cards now have variable interest rates, so rates could increase in the near future. A rise in interest rates would mean more money goes to financing the loan instead of paying down the balance.