Once the darling of American consumers, credit cards are quickly falling out of favor in the U.S. With spending on a steady decline and interest rates sky-rocketing, many Americans are rethinking their relationship with plastic.
A Hard Fall from Grace
It’s undeniable: credit card spending is dropping, and this decrease is painting an unsettling picture of American consumer finances.
Surpassing a staggering $1 trillion for the first time, national credit card debt is raising eyebrows across the financial sector. A grim illustration is seen in Citigroup’s recent data revealing an almost 11% dip in credit card expenditures at retailers.
This marks the fifth straight month where spending has hit the brakes, resulting in the most significant decline this year. The question now on everyone’s lips: What’s causing this?
The culprit? Interest rates that are making cardholders wince. The Federal Reserve’s recent report showed that the average annual interest rate on credit card balances reached a whopping 22.8% by the end of August, a leap from 16.3% just a year prior.
For U.S. consumers, this spike translates to roughly $40bn more in interest payments over the next year. This trend hasn’t gone unnoticed by industry bigwigs.
WalletHub’s CEO, Odysseas Papadimitriou, noted a discernible deceleration in the credit card market. As interest rates soar, people are saddled with credit card debt for more extended periods, struggling to pare it down.
Future Outlook: Not So Rosy
As we approach the holiday season, the financial forecast seems a bit bleak. Citigroup CEO, Jane Fraser, voiced concerns about the dwindling “excess savings” from the pandemic years.
She believes these savings are nearing exhaustion, a sentiment echoed by top retail executives who caution that rising interest rates might further strangle consumer spending.
Such warnings have substance. Walmart’s CEO, Doug McMillon, voiced concerns in August about escalating costs across the board – from gas and utilities to borrowing – all pinching consumer wallets.
However, it’s not all doom and gloom. While credit card spending is slowing, the overall U.S. consumer scene isn’t as bleak. Default rates on credit cards are only slightly higher than pre-pandemic times, suggesting a silver lining.
The U.S. labor market is also offering some support. In September, employers added an encouraging 336,000 positions, indicating resilience in the employment sector.
But the relief might be short-lived. Many Americans depleted their savings accumulated during lockdowns, relying on paused interest rate payments and government stimulus measures.
Now, with the Federal Reserve’s decision to raise rates to combat persistent inflation – the current policy rate teetering at a 22-year high – there might be a tougher road ahead.
The broader consumer landscape isn’t all dire. Expenditures on necessities like rent are still on the upswing, albeit slower. Economists suggest that the drop in credit card spending points to growing financial pressures on lower-income Americans. Banks’ tightening lending standards doesn’t help either.
EY-Parthenon’s projections for the upcoming holiday season hint at a more modest retail sales increase of 3%, a dip from the previous year’s 5.8%. It’s a far cry from the robust 13.2% post-pandemic surge in 2021.
To sum it up, while the U.S. credit card scene is seeing darker days, it’s a reflection of deeper financial shifts and concerns. With soaring interest rates and dwindling savings, it might be time for Americans to take a hard look at their financial habits and choices.
