Ivan Illan is Chief Investment Officer at AWAIM® and bestselling author of Success as a Financial Advisor For Dummies.
Credit card balances in the U.S. have ballooned to more than $1.13 trillion. After having spent most of the pandemic-era “helicopter money,” Americans are now carrying much higher debt to persist in their elevated consumption levels. The challenge is that this record amount of debt is now subject to much higher interest costs, on average a hefty 24.37% credit card interest rate at the time of this writing, placing many Americans in a precarious financial situation. The challenges from this dynamic are seen in the rapidly rising delinquency rates on credit card payments.
Credit card delinquency (of more than 90 days) is currently at 9.74%, which is near the long-term average of 8.95%. At face value, this may indicate that there’s nothing of great concern. After all, the beginning average sounds like a lower-risk dynamic. However, there’s more than just the delinquency rate to reference when assessing economic risk. You should also consider changes to the cost of servicing that debt.
Today’s 24%-plus rate, much higher than the long-term credit card interest rate average since 2000, is punishing disposable (or discretionary) income. So much so, that many Americans are eliminating dining out at fast food restaurants, as prices have remained significantly elevated. Groceries too are still so expensive, which is where most Americans have felt the inflation impact most acutely.
As someone who reads economic journals and articles routinely in the course of my day job, I can personally vouch for how data could be massaged to support a variety of economic arguments. One such argument is that inflation has been trending lower. This is not a correct statement. Instead, this should be said as follows: “The rate of growth on the rate of inflation has reduced.” This is commonly referred to as disinflation. But, price levels are still very much growing ever higher and higher on the foundation of already monumental price growth over the past three years. What most consumers need to see is deflation—which occurs when prices actually stop growing and start falling.
I believe there’s a substantial behavioral economic condition affecting consumers that could be directly attributed to the pandemic-era shutdowns. Many consumers awash with savings post-pandemic embarked on a so-called “revenge spending spree.” Having been cooped up for far too long, once freed from the fear of sickness and death when stepping outside one’s home, consumers experienced a euphoria akin to being released from captivity. This euphoric state is a similar phenomenon that’s been seen many times before in the capital markets, during periods commonly referred to as “bubbles.”
The rising personal debt for most Americans could rapidly spiral toward the consequence of extreme belt-tightening. It may already be too late for many households to reduce their revolving debts sufficiently enough to avert bankruptcy or other financial compromise. The reason why this risk looms over households is that many companies (like households) have also taken on significant debt, taking full advantage of the much lower interest rates that were widely available in 2020 and 2021.
But those big corporate debts are coming due soon, as most corporate bonds were issued with five-year maturities. They’re being faced with the harsh reality of having to either pay down that debt with excess cash (if they’re able) or refinance the debt at rates as much as two to three times higher than the previous terms. In either path forward, companies would be able to free up cash flow quickly by reducing their payrolls. Doing so could be the proverbial straw that breaks the camel’s back, as layoffs would accelerate the financial stress already being demonstrated in the highly concerning credit card data.
Finance professionals across industries should be aware of the impact on their corporate treasury. Market yields may become more volatile due to rapidly changing risk assessments on the strength of the U.S. economy. Short-term bonds may benefit from a flight to safety trade, while intermediate- to long-term bonds could demonstrate downward pricing pressure.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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