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Data released from the Federal Reserve this week showed that credit-card debt topped $1 trillion, which comes at a time when pandemic-era savings are being depleted and with inflation still running faster than the Federal Reserve desires.
So while it is a milestone, perspective is everything, and there was a strong response to this missive from Callie Cox, investment analyst at the brokerage eToro.
She pointed out that relative to bank deposits, credit-card debt is near its lowest level in 20 years.
That generated a firestorm of reaction. One common response is that it’s poorer people who have the credit-card debt, and the wealthy who have the money in the bank.
But even a distributional analysis supports Cox’s point. The Fed does have data, albeit less current, on total consumer credit (so credit-card debt but also auto and student loans) as a proportion of checkable deposits and currency, for just the lower half of the wealth spectrum. It’s very clear that all households, not just wealthy ones, are not as burdened with debt as they have been.
That said there are some recent troubling developments. For instance, at Capital One Financial
COF,
one of the leading credit-card providers, the charge-off rate on domestic credit cards rose by over 2 percentage points year-over-year in the second quarter, and the delinquency rate climbed nearly 1.5 points. Delinquencies were about 10% above the pre-COVID times in 2019.
“We have to remember that the credit performance we saw over the past three years was unprecedented,” said Capital One Chairman and CEO Richard Fairbank, on a call with analysts last month, according to a transcript from S&P Global Market Intelligence. “So we believe there’s some catching up that happens on the other side of that, especially for consumers who might otherwise have charged off over the past three years.”
But he did acknowledge the context. “The consumer is in an exceptionally strong place,” said Fairbank. “And I think that gives a foundation of strength even in the context of an economy that’s got some concerning aspects to it.”
The market isn’t so sure. Credit-default swaps on Capital One in May reached the highest level in 14 years, though they have since fallen back a bit. Credit-default swaps are bets that an issuer won’t pay off its debt.
