Millions of “Subprime Consumers” Getting Credit Cards; What Could Go Wrong?

We’ve said before that the growing level of debt in the US is the elephant in the room we are going to have to address at some point. We’ve talked about the massive government debt and the drag it puts on the US economy. We’ve talked about the crushing weight of student loan debt – increasing at a rate of about $2,726 per second. We’ve talked about the mounting corporate debt, doubling since 2008.

And then there is personal debt.

Americans are burning up the plastic. Credit card balances are on track to hit $1 trillion this year. That is getting close to the all-time peak of $1.2 trillion hit in July 2008, just as the financial crisis was intensifying.

And it’s not just credit card debt. Auto loan balances eclipsed the $1 trillion mark in the first quarter of this year.

According to a Wall Street Journal report, credit card companies are enjoying the boom:

Credit cards are one of the few business lines working for banks right now. Low interest rates have hurt margins on ordinary lending, and a combination of tougher regulation and volatile markets has crimped profits in trading. But banks’ card operations are benefiting from low delinquency rates and could become even more profitable if interest rates rise. Card issuers are trying to capitalize on the good times by raising customers’ credit limits, giving out more cards and pumping up perks.”

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In a recent conference call with investors, Capital One CEO Richard Fairbank said, “We’ll continue to take this opportunity as far as it will take us.”

Indeed.

Until the inevitable crash.

Consider this little tidbit from the WSJ report:

The boom has been driven by steady economic conditions and an improving job market that have made creditworthy consumers less reluctant to take on debt. In addition, lenders have signed up millions of subprime consumers who previously weren’t able to get credit.”

Of course, there could be another reason for the debt surge. People can’t makes ends meet. As we’ve reported, the job market is not really improving. Much of the jobs growth is being driven by people taking on multiple part-time jobs. And as Peter Schiff put it in a recent interview on Fox Business, the economy is a mess.

But no matter the reason, the fact is all of this debt is unsustainable. Lending money to “subprime consumers who previously weren’t able to get credit” is a recipe for disaster. And did you notice that the credit card companies are salivating over higher interest rates? Don’t forget there are debt-saddled people on the other side of that equation who are looking at higher payments. Looks like they might have to start looking for yet another part-time job.

Like all bubbles, this debt bubble will burst. And it’s not going to be pretty.

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