American Consumers Added to Record Debt Level in May

American consumers added to their record levels of debt in May as they continue to struggle to make ends meet in this inflationary environment.

Americans increased their debt load by $22.35 billion in May, according to the latest data from the Federal Reserve. That represents a 5.9% annual increase.

That was a smaller rate of growth than the previous few months, possibly indicating consumers are trying to slow their pace of spending. But credit card use remains far above average.

Americans now owe a record $4.588 trillion in consumer debt.

The Federal Reserve consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt. When you include mortgages, US consumers are buried under more than $15.8 trillion in debt.

Revolving credit, primarily reflecting credit card debt, rose by $7.42 billion in May. That was an 8.1% increase. To put that into perspective, the annual increase in 2019, prior to the pandemic was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.

Revolving debt now stands at $1.111 trillion, just above the pre-pandemic record.

Not only are credit card balances growing; consumers are trying to find ways to borrow even more. According to Fed data, Americans opened 229 million new credit card accounts in the first quarter of this year. That was higher than prepandemic levels.

With interest rates rising, Americans will soon be paying more in interest charges every month, and many will see minimum payments rise. Average annual percentage rates (APR) currently stand at just over 17.1%. That’s up from 16.6% just a month ago. Analysts say they may well rise above 18% by the end of the year, breaking the record high of 17.87% set in April 2019. With every Federal Reserve interest rate increase, the cost of borrowing will go up, putting a further squeeze on American consumers.

Americans, by and large, kept their credit cards in their wallets and paid down balances at the height of the pandemic in 2020. This is typical consumer behavior during an economic downturn and the trend was even more pronounced with pandemic stimulus checks. Credit card balances were over $1 trillion when the pandemic began. They fell below that level in 2020 with an 11.2% drop. We saw small upticks in credit card balances in February and March of last year as the recovery began, with a sharp drop in April as another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May 2021. Since then, we’ve seen a steady increase in consumer debt with a huge surge in borrowing in March and April.

In another disturbing trend, consumers are turning to buy now, pay later (BNPL) installment plans to finance everyday purchases such as gasoline and groceries. This data is not included in the Fed’s consumer credit report. One analyst told CNN, “The opportunity to stack your debt by using multiple Buy Now, Pay Later loans through multiple service providers is one of the biggest risks I see.”

The pace in the growth of non-revolving credit, including auto loans and student loans, slowed in May, rising by $14.93 billion, a 5.2% increase. Americans now owe $3.477 trillion in non-revolving debt. The slowdown in non-revolving credit likely reflects a slowdown in big-ticket purchases such as autos, along with the summer college break.

Rapidly rising levels of consumer debt undercut Federal Reserve Chairman Jerome Powell’s claim that “households are in very strong financial shape.” Using buy now, pay later plans at the gas station is not a sign of financial health, nor is the rapidly rising level of credit card debt. The fact is, this signals that Americans are struggling to make ends meet as prices rapidly rise, and they’re burying themselves in debt to keep their heads above water. The stimulus checks are long gone. Savings are being depleted. The average person has no choice but to pull out the plastic.

Of course, this is not a sustainable trajectory. A credit card has this inconvenient thing called a limit.

In a nutshell, the Federal Reserve and the US government built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards. It’s a kick the can down the road economy. The question is when do we run out of road?