Consumer Debt Breaks Record as Americans Up Borrowing to Cope With Inflation

Consumer debt climbed to a new all-time record in April as Americans continue to cope with rapidly rising prices.

Total outstanding consumer debt rose by $38 billion in April, reaching a new record of $4.57 trillion, according to the latest data from the Federal Reserve. Total consumer debt was up 10.1% in April. It was the third straight month that consumer debt increased by $30 billion or more.

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.

With stimulus money long gone, Americans have clearly turned to credit cards to keep up with soaring inflation. Revolving credit, primarily reflecting credit card debt, rose by $17.8 billion. That was up a sizzling 19.6%. This follows on the heels of a record 29% gain in March. Revolving debt now stands at $1.103 trillion, just slightly 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 16%. 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.

Credit card delinquencies are creeping up. In Q1, delinquencies stood at 1.73%, up from 1.63% in Q4 2021 and 1.48% at the post-pandemic low. This is still far below the delinquency levels we saw during the Great Recession, but we are still early in this downturn.

Non-revolving credit, including auto loans and student loans, rose by $20.3 billion, a 7.1% increase. Americans now owe $3.464 trillion in non-revolving debt.

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. 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. Since then, we’ve seen a steady increase in consumer debt culminating in March’s decades-high surge and continuing into April.

Meanwhile, Americans are burning through their savings.

The personal savings rate dropped to 4.4% in April, the lowest level since 2008. That compares to 6% just a few months ago and 33% in April 2020 when Americans were locked in their homes and stashed away some of that stimmy money.

CNN informs us that this isn’t necessarily bad news. “Some of this reflects rising consumer spending, which is good for the economy, of course, and also things like population growth and increased card usage (rather than cash),” according to the only analyst quoted in the story.

It is true that consumers are spending more. But it seems like a stretch to argue that paying more for gas, groceries, and everything else is “good for the economy.” And the fact that a lot of people use cards instead of cash shouldn’t result in rising credit card balances if people are paying off their purchases each month. In reality, Americans are turning to credit cards simply to make ends meet in this inflationary environment. The stimulus checks are long gone. Savings are being depleted. So, 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.

Meanwhile, officials at the Federal Reserve insist they will be able to raise interest rates and tighten monetary policy because the economy is strong (despite a big contraction in GDP during the first quarter). But the rising levels of debt seem to indicate that apparent economic strength is a smokescreen. Running up credit cards is not a sustainable economic model. Americans can make ends meet by borrowing on plastic for a while, but when they hit those limits — then what?

Rising interest rates will push balances toward those limits even faster.

In a nutshell, the Federal Reserve and the US government have 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?