There’s No Such Thing As Good Debt

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Key Takeaways:

• Even the debt-averse tend to consider mortgage debt good debt. Maybe not anymore. 
• Bad debt – particularly credit card debt – just got a lot more expensive. 
• Where we might be headed and what you can do about it. 

Last week, 30-year mortgage rates eclipsed 6%, hitting 6.28% for a hot second, before retreating to a hair over 6%. The impact of these constantly rising rates continues to blow The Juice’s mind. 

• Using the median list price as of May 2022 – $447,000 – the monthly payment on a 30-year mortgage with 20% down and a 6% interest rate comes to $2,144. 
• Go back a year when the median list price was $380,000 and the 30-year rate was 3.26% and your monthly payment was $1,325. 

What was once considered good debt feels a lot like bad debt, particularly when you consider the impact of record home prices alongside rising interest rates. 

How About Credit Card Debt? 

Never good debt, right? How ‘bout now? 

• For the first time since Lending Tree started tracking credit card interest rates in 2018, they’re over 20%. 
• To be precise, 20.2%, though good credit will score you an APR offer of 16.53%. With bad credit, expect something closer to 23.79%. 
• Make a $133 minimum monthly payment on a $5,000 balance at 20% interest and it’ll take you roughly 23 years to pay off your debt. You’ll pay $7,723 in interest alone during that time.  

Also sucks. 

Is BofA Too Bullish On Credit Card Debt? 

In its report, BofA says it was searching for bearish signs on the consumer. 

While it discovered some “bearish sentiment,” particularly as it relates to inflation, the bank was “struck by strong momentum in service sector spending.” BofA also called the share of credit card spending, relative to debit card spending, a “favorable sign,” noting that… 

…it does not appear that households are having to spend more on credit cards to pay rising bills. If we only focus on households with annual income less than $50K, we also find that credit card spending as a share of total card spending was around the same level as in May 2019 (Exhibit 9).

Data from Barclays shows a precipitous decline in spending on services, contrary to BofA’s contention. 

Source: The Washington Post

And, also, how does Bank of America explain what we told you the other day in The Juice:

Revolving debt – primarily credit card debt – jumped 19.6% in April, hitting $1.103 trillion. That breaks the pre-pandemic record of $1.1 trillion.

BofA also reports “household savings” remain higher than 2019, suggesting “households continue to have higher ‘buffers’ relative to before the pandemic.” 

This counters something else we told you the other day: That the personal savings rate continues to plummet. At 4.4%, it’s at its lowest point since 2008.  

Are BofA’s 67 million consumer clients not contributing to these numbers? Something doesn’t make sense. We’ll continue to track the consumer debt and personal savings data and update it as needed. 

For Now, What To Do? 

Here’s what we know for sure. 

People are swiping their credit and debit cards as much, if not more than they were before the pandemic. Either because they’re doing super well and spending or because they’re hurting and turning to plastic. Or maybe a situational mix of both. 

If these trends continue, two companies who will most certainly continue to benefit are Visa (V) and Mastercard (MA), two of the top names investors searched for this month among credit services stocks in our proprietary Trackstar database. 

Both companies crushed revenues and profit estimates in their most recent quarterly reports. Both companies reaffirmed guidance of high-teens to 20% revenue growth for the full year, even when factoring in the Russia-Ukraine situation. 

The Bottom Line: If there’s anything certain about the present economy – at micro and macro levels – it’s rampant uncertainty. 

Micro: Who still has savings left? Who’s running up credit card debt because they’re doing super well? Who’s turning to credit cards as a sign of not making ends meet? 

Macro: Will stocks remain in bear territory? Will crypto keep crashing? Will there be a recession? 

To secure some level of certainty in your personal finance, make moves that focus on cash security. 

Save strategically. Resist taking on debt. 

From an investment standpoint, go with industry leaders who provide necessary goods (e.g., Procter & Gamble) and services (e.g, Visa and Mastercard) regardless of the broad economic environment. If the company pays a healthy dividend (check on all three mentioned) and has proven it can weather turbulent times (ditto), consider seizing the opportunity to buy shares on weakness.

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