Credit Card Debt Soars - InvestingChannel

Credit Card Debt Soars

Proprietary Data Insights

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#4Dollar Tree62
#5Big Lots30

Get Ready For Higher Prices Jan. 1

Food is about to get more expensive.

Many consumer goods retailers plan to execute price increases at the start of the year.

Not all of them are taking the full amount.

Yet, the average is around 5%-8% on everything from canned goods to cookies and candy.

Mustard is an outlier with expected increases of around 20%.

As we point out in our main story, middle and lower-income families are disproportionately affected by higher debt and inflation with so much of their income dedicated to essential goods such as food and shelter.

This is likely to push consumers to become more thrifty in their purchases. Unfortunately, it’s unlikely to lower inflation driven by supply-side issues.

That’s why it’s a bit concerning to see the market hit all-time highs when 2022 is definitely in the question market category.


Credit Card Debt Soars

Key Takeaways

  • After paying off a record $83 billion in credit card debt in 2020, consumers added $30 billion to their balances over the last two quarters.
  • Buoyed by government spending and support, consumers now need to rely on their primary incomes to pay off credit card debt.
  • Buy Now Pay Later (BNPL) balances aren’t reported in credit card debt, which makes it harder to track.

2020 was the year of savings.

2021 was the year of spending.

From Savers to Spenders

Americans paid off an incredible $83 billion in credit card debt in 2020 fueled by government support such as unemployment benefits, stimulus payments, and loan payment deferrals.

It was the second time in the last 35 years where Americans owed less credit card debt at the end of the year than when they started.

But all that changed this holiday season.

Credit card balances rose by $17 billion in Q3 to $800 billion. However, that’s still down $123 billion from the end of 2019.

In 2021, total credit debt hit a low of $770 billion before climbing to current levels.

Balances are expected to rise in 2022, as much as 10%, as more people apply for credit and increase their spending, according to TransUnion’s forecast.

By the end of Q4, total balances are expected to rise to $805.7 billion.

What About BNPL?

The rise of buy-now-pay-later creates a second problem.

Increasingly popular among Gen Z, BNPL doesn’t show on credit card balances, effectively creating shadow debt.

It’s akin to the Port of L.A. showing fewer boats waiting to dock by pushing them further out to sea so they aren’t counted.

Because of this we know that credit card debt understates total consumer debt. But, we just don’t know by how much.

Currently, BNPL borrowing comes in around $50-$70 billion annually. We just don’t know what the balance is at any given time.

Consumer Debt Harder to Pay

History shows that credit card debt is much costlier and harder to pay off given the high-interest rates.

While BNPL offers sweeteners such as low or no interest, they find other ways to make money such as charges for rescheduling payments and massive late fees.

The Bottom Line: As government assistance pulls back, middle and lower class families will rely on their primary income to pay back credit cards.

That means less spending on discretionary items at stores such as Wal-Mart (WMT), Dollar General (DG), Big Lots (BIG), and other value stores.