By most accounts, the American economy seems to be humming along very nicely. Unemployment just hit a nine-year low, the stock market this month climbed to all-time highs, and consumer confidence is as chipper as its been in two years.
But at least one indicator suggests that much of the US is actually struggling financially: Americans are piling on credit card debt at record levels that we haven’t seen since the financial crisis.
Households added $21.9 billion in credit card debt in the third quarter — the largest increase for that period since 2007 — bringing the amount of outstanding credit card debt to $927.1 billion, according to the latest study from WalletHub. That matches the mark in 2007 before the recession began, and it’s the highest tally since the end of 2008, when the global economy was experiencing a full-on implosion.
Racking up credit card debt isn’t inherently bad, so long as it’s being paid back. And so far, Americans are defaulting on their credit card debt at near historically low levels. Charge-off rates — the percentage of credit card debt that the companies are unable to collect on — are only at 2.86%, compared with 3.95% in 2007 the quarter before the Great Recession began and in excess of 10% in the years following the crisis, according to WalletHub.
But holding a balance is a lousy move from a personal finance perspective — a sign of financial fragility. The fact that the average household with debt now owes $7,941 to credit card companies, according to WalletHub, suggests that America’s putative economic strength might be a mirage — that the economy may in fact be a lot weaker than all the happy indicators are leading people to believe.
“I think it is a cause of concern because it says consumers are struggling despite the low unemployment figures,” says Lucia Dunn, an economics professor at Ohio State University.
“I think the rise in debt arises from weakness in the economy. People whose incomes have dropped may be trying to maintain an older level of consumption by just charging everything.”
This behaviour is not unlike what Dunn saw during the Great Recession, when she was monitoring and researching consumer debt data.
“Credit card (debt) shrank in some sectors because people had their accounts closed. But for our sample who maintained a credit card, credit card debt actually rose. People substituted credit for income,” Dunn says.
Why would Americans be struggling when unemployment is so low? Well, having a job and having a well-paying job are two different things. And wages have largely remained stagnant in the 21st century.
So far, Americans are managing to balance their increased credit load without much calamity. But if the trend continues, and defaults start to rise, the American economy could get pretty ugly — indicators and all.