Personal Wealth Management / Market Analysis

Does Credit Card Debt Mean Consumers Are Tapped?

Debt has risen, but we see several mitigating factors.

In our experience, not many things garner the public’s attention like a big round number, and publications we follow sure made hay with one last week: US credit card balances now top $1 trillion (£787 billion) for the first time ever, per a New York Federal Reserve report.[i] In turn, financial commentators we follow raised the alarm about inflation (broadly rising prices across the economy) forcing consumers to accumulate personal debt to keep spending, implying tapped-out consumers will soon pose big economic headwinds. Moreover, we have seen similar chatter around UK consumers’ credit card debt lately, which sits around £66.4 billion.[ii] Not a round, attention-grabbing number, but big enough to raise eyebrows, judging from all the commentary we have read on the matter in recent months. Yet as with all big numbers, we think it is important to scale and consider context. Do so with credit card debt, and we think it becomes clear this isn’t a big economic risk that jeopardises this market recovery.

It can be easy to get hung up on the sheer size of credit card debt, much as people tend to do with UK public debt, in our experience. But as with public debt, we think the total amount outstanding is meaningless. What matters more, in our view, is how big it is relative to society’s ability to keep servicing debt. With credit card debt, we think there are a few ways to look at this. Exhibit 1 shows two: credit card debt as percentages of gross domestic product (GDP, a government-produced measure of economic output) and after-tax personal income. Since credit card debt isn’t adjusted for inflation, we used nominal GDP and nominal income to keep like with like.

As you will see, debt was slightly higher for most of the last 20 years and has fallen markedly from prepandemic levels. Turns out that whilst inflation lifted consumer debt as prices rose, it also boosted incomes and total output.

Exhibit 1: Scaling Credit Card Debt, Take One


Source: Bank of England, Office for National Statistics and FactSet, as of 9/8/2023.

Then again, in our opinion, this measure suffers the same flaw we think applies to comparing government debt to GDP: It is a stock/flow mismatch. That is, debt is a stock measure—total amount accumulated. GDP and income, by contrast, are flows—the amount of activity in a set period. So let us compare credit card debt to another stock: total deposits. Here, too, credit card balances remain near generational lows on a relative basis.

Exhibit 2: Scaling Credit Card Debt, Take Two


Source: Bank of England and FactSet, as of 9/8/2023.

If credit card debt didn’t break consumers or the UK economy when it topped 4% of disposable income, 4% of GDP and 6.5% of deposits, we doubt it is a massive negative now at 2.5%, 2.5% and 3.0%, respectively.[iii]

Here, you might respond with yah, but personal income and deposits are boosted by high-income households, and lower-income earners tend to own credit card debt. Fair enough, although as The Washington Post’s Michelle Singletary explored at length Tuesday, high-income households in the US tend to carry more credit card debt than people think.[iv] Yet we actually have a very easy way to see if UK households are buckling under heavy credit card debt: delinquencies. Enter Exhibit 3, which shows the percentage of credit card balances that are between 60 and 180 days delinquent. As of March, which are the latest data available, that figure was 0.74%, below prepandemic levels and well below the norm before 2007 – 2009’s global financial crisis.[v] Speaking of which, we think that period is also a timely reminder that consumer debt difficulties tend to follow, rather than cause, tough economic times.

Exhibit 3: Delinquency Ratios Are Benign


Source: Fitch Ratings, as of 9/8/2023.

For several months now, many commentators we follow have warned credit card debt is about to cause tough economic times, keeping expectations and sentiment low. Great. In our view, that lowers the bar reality needs to clear to continue delivering positive surprise and propelling stocks up this market recovery’s wall of worry.

[i] “Total Household Debt Reaches $17.06 Trillion in Q2 2023; Credit Card Debt Exceeds $1 Trillion,” New York Federal Reserve, 8/8/2023.

[ii] Source: Bank of England, as of 8/8/2021.

[iii] Source: New York Federal Reserve, St. Louis Federal Reserve and Bureau of Economic Analysis, as of 9/8/2023.

[iv] “Credit Card Debt Tops $1 Trillion, Trapping Even Six-Figure Earners,” Michelle Singletary, The Washington Post, 8/8/2023. Accessed via MSN.

[v] Source: Fitch Ratings, as of 9/8/2023.

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