Tatiana Bailey: Americans’ debt load continues to increase

In previous articles, I’ve covered the increase in credit card and auto loans alongside the unfortunate increase in delinquency rates for these types of loans. The latest data confirms that this trend is still in full force.

Consumer-related credit, excluding mortgages, is at the highest level it’s been in the U.S., surpassing $5 trillion in November. If you combine all types of consumer credit such as mortgages, credit cards, auto loans, student loans and other categories, household debt is at about $17 trillion.

By way of reference, annual GDP in the U.S. in 2023 was about $27 trillion.

In many ways this is surprising, given the marked increase in interest rates. Average credit card interest rates are almost 22%, and average auto loan rates are almost 9%. This is adding up for the average consumer, with delinquencies for those two categories increasing sharply since mid-2021.

There are two factors I consider alongside this data:

One, how much does the average household owe relative to their income? Nonmortgage interest payments as a percentage of disposable income are now at levels comparable to 2007, telling me delinquency rates are likely to increase this year.

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Two, what does the labor market look like? Are many people likely to lose their jobs and therefore default on their various loans? Thankfully, the answer to this question is no. Because of the tsunami of retirees relative to the working-age population that I often talk about, the unemployment rate is not likely to materially increase.

I recently heard an estimate from a panel of labor economists who said the projected increase in the unemployment rate to 4% this year from the current 3.7% represents about 600,000 lost jobs. During the Great Recession, nearly 15 million jobs were lost. If someone has a job, it is less likely they will default on loans, as they know it impacts their credit rating. Hence, the strength of the labor market will mitigate the excessive borrowing to some extent.

But there is one cautionary caveat: There has been a dramatic increase in buy-now-pay-later (BNPL), in which individuals can make a purchase and pay in interest-free installments. It’s been estimated that there has been a ninefold increase in BNPL since 2019. And the 2023 increase is estimated to be equivalent to roughly one-third of the sizable increase in credit-card debt. Thus, the overall increase in consumer borrowing is much larger than what the official statistics track (e.g., just credit cards, not BNPL).

With such high interest rates, BNPL might seem like a good thing. However, it’s not tracked very well. But some proxy data is showing that lower-income individuals who use this mechanism are more likely to be overstretched financially. Often, they don’t qualify for a credit card. And since it’s not well regulated, there are often hidden fees in buy-now-pay-later.

From an economic standpoint, I worry that the increased reliance on credit, especially for lower-income households, is likely worse than what most economists realize. This is something I am watching closely

Tatiana Bailey is executive director of the nonprofit Data-Driven Economic Strategies. An abridged video with this information can be found on ddestrategies.org.

Tatiana Bailey is executive director of the nonprofit, Data-Driven Economic Strategies. An abridged video with this information can be found on ddestrategies.org.