Credit card debt is skyrocketing in America, is this a red flag for recession?

As Americans struggle to pay the rising cost of rent, food and just about everything else, they are racking up credit card debt in record numbers.

With inflation at its highest level in 40 years, credit card balances account for about $890 billion of the $16 trillion in US household debt, according to the Federal Reserve Bank of New York.

The total number of credit cards hit an all-time high of more than 500 million in the second quarter of 2022, credit reporting agency TransUnion reported. Gen Z adults between the ages of 18 and 25 led the wave.

A total of 233 million new credit accounts were opened in the second quarter, the most since 2008, according to another New York Fed report.

Credit card balances also jumped 13% in the second quarter, the biggest year-over-year increase in more than 20 years. CNBC reported.

Delinquencies are back near pre-pandemic levels, but as long as people have jobs, “I don’t see anything that I would really declare as a red flag,” said Michele Raneri, vice president of research and consulting in the United States at TransUnion.

Mastercard and Visa credit card issuers report booming earnings and tap into Americans’ thirst for debt by offering travel-related bonuses and cash back on purchases.

A Wells Fargo investigation found that 49% of rewards cardholders rely on their credit card rewards to help offset some of the costs of everyday purchases.

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American borrowing rose 6.3% in May and 10.5% in June, according to the Fed. G.19 consumer credit report. Outstanding credit card balances rose 7.8% in May and 16% in June.

Consumer spending raises red flags for Matt Maley, chief market strategist at Miller Tabak + Co.

“Credit card debt is now over $900 billion – an all-time high – and revolving debt, which of course includes credit card debt, is $1.4 trillion,” Maley said. said. With real incomes falling, “the only reason consumer spending is holding up is because people are going into more debt to do so. And it can’t last forever.

Like the big banks increase provisions for customer defaultsome investors see it as a warning sign, Bloomberg reported.

“When they increase bad debt reserves, it’s because they’re concerned that businesses, people, customers won’t be able to return the money loaned to them,” said analyst Fiona Cincotta. Senior Financial Markets at City Index. ltd. “This is just another warning signal that we are seeing, that the markets are reading in which we need to worry about a recession in the months ahead.”

Shawn Cruz, chief business strategist at TD Ameritrade Inc., described a business as usual scenario. “If you look at loan reserves as a percentage of outstanding loans, that’s more or less in line with what we’ve seen or what we would expect to see for a loan portfolio of this size.

“If all of a sudden they start saying, ‘look, a lot more of these loans that we have out there are going to start having problems or become a little bit more uncertain as a percentage of the overall portfolio,’ that would be, I think, little more than a warning sign. But right now, they don’t see any warning signs that there’s a huge toll ahead for the credit market.

Photo: iStock / Georgii Boronin, https://www.istockphoto.com/portfolio/GeorgiiBoronin?mediatype=photography


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John A. Bogar