Bloomberg reported that credit card debt levels in the US recently exceeded the levels at the peak of the Global Financial Crisis. Consider that US consumer credit card debt hit an all-time high in June 2017 when it topped out at $1.02 trillion according to the Federal Reserve Bank. Major US banks and lenders in the form of JPMorgan Chase & Company, as well as Citigroup Inc. are vying for their slice of credit card customers with existing balances. In an era of extraordinarily low interest rates, customers are being enticed with credit card offers to try and get them to sign up with big banks and credit card companies. Fortunately, the status quo is far more favourable to US households in 2017 than it was in 2008/2009 when interest rates were significantly higher.
Additionally, the unemployment rate is at multi-decade lows, coupled with low inflation and an otherwise ‘booming’ economy. Back in 2008, the housing bubble burst and trillions of dollars were wiped off global bourses. The financial meltdown that ensued threatened to upend economic stability around the world. Were it not for bold initiatives by the Federal Reserve Bank, the Bank of England, the Bank of Japan, and the European Central Bank, a meltdown most certainly would have occurred. In the US, the crisis resulted in banks eliminating some $100 billion+ in credit card-related loans from their books. This all took place within a 2-year period. In February 2017, the total outstanding debt on credit cards in the US breached the $1 trillion level.
Credit Card Companies Happy to Lend Money Out
Concerns mounted as major credit card companies such as Synchrony Financial, Capital One Corporation, and Discover Financial Services posted results of write-offs (credit card debt that would not be recovered): unrecoverable bad debts in Q2 2017 increased sharply. Equally concerning is the fact that US household credit card debt is now at its highest level in history. Outstanding revolving credit card debt now exceeds the worst levels seen since April 2008 when it was also at $1.021 trillion. For those wondering why credit card debt levels are growing so rapidly, there are several factors to bear in mind:
- Interest rates are at historic lows, despite the Fed’s push to raise the federal funds rate as inflation begins to rise
- The US economy has turned the corner since the financial crisis and things are markedly better, although there is room for improvement
- Lenders are eager to snap up as many borrowers as possible with low interest rate credit card offers
Lower Spending Limits on Credit Cards
However, it should be borne in mind lenders have put limitations on credit card balances. Nonetheless, it’s important to pay close attention to outstanding balances, and the interest-related payments that must be made. While interest rates are currently low, the APR (annual percentage rate) of credit cards ranges from 15% through 28% and this means that customers are paying interest on their interest. At such high rates, it’s important to manage credit card debt before it overwhelms your household budget.
One way to do this is debt consolidation – the process of grouping together similar debt like credit card debt and paying it off with a loan through another lender at a lower interest rate than the credit card debt. The benefit of debt consolidation is that you can immediately pay off high-interest debt with a low interest loan and use the money saved to pay down other debt or use as savings.
According to the New York Federal Reserve Bank, US household debt spiked over $1trillion in March 2017, a worrying trend. The bulk of US household debt remains locked in the following areas: mortgage debt, student loans, automobile loans, credit card debt, and medical debt. The rise in student loans and automobile loans is disturbing. Household income is not growing as quickly as the rising costs of medical coverage, and other expenses. At two thirds of overall household debt, mortgage debt is the most pressing concern. However, it is regarded as good debt since the real estate is an asset with a value proposition.