Once a month, the U.S. Federal Reserve issues a report on consumer credit and indebtedness. The latest installment for the month of June, released Friday, August 6 (The G-19 Report on Consumer Credit), paints a picture of consumers and households that are still in the throes of a difficult deleveraging process. In the longer term, this is exactly what is needed to help put our nation’s economy back on a solid foundation for recovery and renewed growth. But because deleveraging involves two steps (first, avoiding spending based on new borrowing, and, second, directing current discretionary income toward debt repayment rather than consumption), it limits how much consumers can contribute to the current recovery. In this Weekly Market Update, we’ll focus on one aspect of consumer credit and indebtedness—credit card borrowing (also among the most expensive borrowing)—to analyze how the process of household deleveraging is coming along.
Credit Card Nation
To the uninitiated, an overview of statistics regarding the credit card industry and use of credit cards by U.S. consumers can be truly mind boggling. There are numerous sources of information (government agencies, industry/trade groups, consultants, consumer advocacy organizations).
Based on these sources, here is an overview of credit card use in the U.S.*
- Approximately 177 million Americans (over the age of 16) hold 610 million credit cards. That works out to an average of three to four credit cards per card holder.
- Total consumer revolving debt, 98% of which is made up of credit cards, was $827 billion in June of this year.
- The mean (or average) unpaid credit card balance is approximately $3,400 per card with an unpaid balance. (Not all of the 610 million cards have unpaid balances.)
- On the other hand, the median unpaid credit card balance (where the median is an amount where 50% of cards have a lower balance and 50% have a higher balance) is approximately $100 per card.
- About 25% of all consumers do not have any credit cards.
- Of the remaining 75% who do hold credit cards, about one quarter pay their balances off every month.
- That leaves approximately 55% of all credit card holders who have carried an unpaid balance at some point in the past 12 months.
- In one survey of credit card users, 36% of respondents did not know the interest rate on the card they used most often.
- The average age at which a U.S. consumer under the age of 35 first acquired a credit card is 21 years old. In contrast, the average age of acquiring a first credit card for someone currently 65 years old or older is 41 years old.
Depending on your perspective, you may be most amazed by the fact that nearly (1) 25% of all consumers age 16 and older do not have any credit cards; (2) a quarter of all credit card holders pay off their balance due every month (or conversely, three-quarters don’t); or (3) the huge difference between the average ($3,400) and median ($100) unpaid balance on credit cards (meaning that there is a subset of very heavily indebted cardholders who cause this skew).
And the final fact comparing what age people acquired their first credit card for those under 35 years old versus those over 65 is one indication of how our nation’s psyche has been conditioned over the past four decades to view credit cards as a necessity and essential step towards adulthood. According to an April 2009 survey by student loan underwriter Sallie Mae, approximately 85% of the student population has a credit card (much higher than the overall national average) and half of these students hold four or more cards (also higher than the national average).
Signs of Deleveraging
The first chart below illustrates the annualized monthly percentage change in revolving consumer debt (again, overwhelmingly credit card debt) as reported by the Federal Reserve from January 2000 to June 2010. The vertical line on the chart provides a point of reference for when the Great Recession officially began (December 2007). For the period from January 2000 to November 2007, the average percentage increase was 5.4% annually—a rate of growth much higher than the growth in population or real income growth per household (or both combined) during this same period. Since December 2007, the change in revolving consumer debt has averaged -4.9% annually. And since September 2008 (nearly two years ago), we have not had a single month of positive percentage change in revolving consumer debt. In comparison, the recession beginning in March 2001 registered only four months of negative change in revolving consumer debt. And during the 12 months following the start of that recession, it grew at an average annual rate of 2.4%.
Source: U.S. Federal Reserve Bank G-19 Report on Consumer Credit
In the next chart below, we plot both revolving (i.e. credit cards) and non-revolving (mainly term loans excluding home mortgages) on an absolute dollar basis over the same time frame of January 2000 to June 2010. Consistent with the previous chart, the line for revolving consumer debt shows a substantial decline of approximately $150 billion between September 2008 and June 2010.
Not all that decline is due to consumers paying down their unpaid credit card balances, however. Some of the decline is due to consumers filing for bankruptcy which has increased substantially over the past three years. Lenders wrote off as uncollectable $11.1 billion in home mortgages and $19.9 billion in home equity lines of credit in 2009. And year-to-date, the combined total write-offs total $7.9 billion. Other signs of the financial stress consumers are under can be seen in delinquency and default rates on credit cards. Fitch Ratings recently reported that the annualized rate of default on credit card debt was 12.9% while the 60-day delinquency rate (days beyond a due date without receiving even a minimum payment) was 4.3% and the 30-day delinquency rate was 5.7%.
The other line in the chart below plots the absolute change in non-revolving consumer debt. While this has not declined since the Great Recession, its growth has essentially stopped as this level of debt has reached a plateau of approximately $1.6 trillion. From January 2000 to November 2007, non-revolving consumer debt grew at an annualized monthly rate of 6.2%. While the end of this growth doesn’t represent paying down existing debt, it does meet our other criteria of deleveraging, which is avoiding spending that involves new borrowing. This is another reason why the U.S. consumer has largely been absent from participating in the economic recovery that began in the second half of 2009.
Source: U.S. Federal Reserve Bank G-19 Report on Consumer Credit
When Will Deleveraging End?
The answer to when the deleveraging process by consumers will end is not a single aggregate number (e.g. “when revolving consumer debt drops below $600 billion”). Instead, it depends more on the individual assessments and expectations of consumers regarding their present financial well-being and security plus the future outlook for these. In addition to their own levels of indebtedness, three factors are likely to matter in these assessments: (1) renewed growth in their real wages/income; (2) substantial declines in unemployment driven by new hiring and economic growth; and (3) some level of recovery in the longer-term outlook for housing prices.
But even as these factors fall into place, perceptions of economic recovery are likely to lag reality given both the depth and duration of the Great Recession. If the Great Recession can have one positive impact, it may be that consumers learned an important lesson on the risks of becoming overextended in their use of unsecured debt like credit cards. With that lesson learned and renewed economic optimism/confidence, growth in consumer spending can form the foundation of a sustainable economic recovery.
American Century Investments® offers a wide variety of stock, bond, asset allocation and money market funds.
Contact one of our Investment Consultants to learn more.
* The primary data sources used for the facts shown in the section titled Credit Card Nation are:
- Federal Reserve Bank G-19 report on consumer credit for June 2010
- “The Survey of Consumer Payment Choices” conducted in late 2008 and published by the Federal Reserve Bank of Boston in November 2009
- “Financial Capability in the United States” published by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation, December 2009
- “Vicious Cycle: How Credit Card Companies Are Squeezing Consumers and Undermining the Recovery,” a report presented to the U.S. Congress Joint Economic Committee, May 2009
- “How Undergraduate Students Use Credit Cards,” a report prepared by Sallie Mae, April 2009
- “Credit Card Statistics, Industry Facts and Debt Statistics” at creditcards.com
___________________________________________________________________________
Investment return and principal value will fluctuate and it is possible to lose money by investing.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. Click here for a prospectus or summary prospectus, which contains this and other information about the fund, and should be read carefully before investing.
© 2010 American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
(c) American Century Investments
