One big question about the dramatically lower US credit card debt

·Senior Writer
·2 min read

In data released Wednesday from the New York Fed, credit card balances shrunk by $49 billion, compared to the last quarter.

This aligns with earnings calls from financial institutions, which reported balances down and payments up as people endeavor to carry less debt month-to-month.

But amid all of these people paying off debt, the reopening is in full swing, the economy is soaring, and spending is on the rise — and increased spending is something that usually accompanies higher credit card balances. The NY Fed called this “remarkable” and “confounding.”

On Thursday, Bank of America (BAC) published its aggregated credit and debit card data, releasing some details about spending, at least with the bank’s branded cards. It found that total card spending increased 37% in the first week of May compared to 12 months ago, and 21% two years ago (the two-year comparison is important for adjusting for the pandemic's drop in spending last year).

(Bank of America)
(Bank of America)

“This is considerably above the average pre-pandemic two-year growth rate of about 8%,” the bank noted.

This can mean one of two things

If spending is up and debt is down, that might mean a new paradigm for consumer finances and banks, with healthier household pocketbooks for families and lower profits for banks, which have expressed concern in earnings calls.

“It appears that many households are working to reduce their revolving debt balances, and this is happening across the board,” the Fed wrote.

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But the problem is it’s hard to know how much of this is because of lower balances due to the pandemic. The New York Fed pointed out that new balances and old balances look the same, so debt and balances could catch back up as the reopening progresses.

Bank of America, which issues credit cards unlike the New York Fed, have at least some clues on this. The bank reported an increase in credit card spending this past week, "the strongest level since the recovery began." Debit card spending has exceeded that of credit cards, but that might change as stimulus checks, last sent out in May in the ninth batch for processed returns, are all spent.

Another clue that the New York Fed had to whether these lower balances are temporary comes from the different spending habits among age groups. While Bank of America did report balance reductions “across the board” for various income levels, this was not the case between younger and older people. Again, a K-shape emerged, with younger people who participated in the reopening and started spending sooner having higher credit card balances, “nearly back to their previous level by the end of the year,” the Fed pointed out.


Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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