Are Americans Close to Maxing Out Their Credit Cards?

Consumers continued to pile on debt in August, according to the latest data released by the Federal Reserve. But credit card debt fell slightly, raising a troubling question: are consumers close to maxing out the plastic?

Total consumer credit grew by another $17.9 billion in August. That represents an annualized increase of 5.2% and pushes total consumer indebtedness to a new record of $4.14 trillion (seasonally adjusted).

The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

Despite the overall rise in consumer debt, revolving credit balances fell by $23.3 billion, a 2.2% decrease. Analysts expected a pullback in revolving credit after credit card balances saw their biggest increase since November 2017 in July. This pace of borrowing was considered unsustainable.

Even with the drop, Americans still owe over $1.7 trillion in credit card debt.

A sharp increase in non-revolving credit – made up primarily of auto loans, student loans and financing for other big-ticket purchases –  pushed overall consumer indebtedness higher. Borrowers piled on another $238.1 billion in non-revolving debt, a 7.8% increase.

You can look at the drop in credit card balances in two ways. A falling credit card debt-burden could certainly be viewed as a positive. The decrease in revolving credit could mean consumers are paying down balances and getting their financial houses in order.

Or it could simply mean that consumers have maxed out the plastic and they simply can’t charge any more.

A drop in credit card debt makes mainstream pundits nervous. After all, consumer spending drives the economy. The conventional view is that consumers charge up their credit cards when they are confident about their economic prospects. But it could just as well mean they are tapped out and charging everyday purchases on plastic. In fact, the growth in consumer debt could signal Americans are struggling to make ends meet. After all, a lot of people use their credit cards as an emergency fund.

Whether driven by confidence or desperation, debt-fueled spending can’t go on forever. Credit cards have this inconvenient thing called a limit. And they have to be paid off at some point. At best, “confident” American consumers are borrowing money from their future. What happens when the future gets here?

The truth is American consumers have been driving the US economy with money they don’t have. If they are getting close to maxing out the credit cards, that doesn’t bode well for future economic growth. If that moment isn’t upon us yet, it will be at some point in the not-to-distant future.

Meanwhile, bankruptcies are increasing. While still well-below Great Recession levels, analysts say there is an uptrend. US bankruptcy filings came in at 61,113 in September, up 6% from last September’s total of 57,619, according to the latest data from the American Bankruptcy Institute.

As Peter Schiff noted in a podcast after the Q2 GDP number came out, this notion that the US economy is strong is “fake news.” Consumer spending increased by 4.3% and contributed nearly all of the GDP growth. Many of the headlines credited the American consumer with “rescuing the economy.”

The problem is if the consumer rescued the economy, who is going to rescue the consumer? Because if you look at where the consumer is getting that money, it’s from credit. Year-over-year, consumer debt has increased by 5%. So, what is driving consumer spending is debt.”