LendingTree Debt Report – February 2020
- Holiday spending will likely add about $18 billion to consumer debt, increasing credit card and revolving debt to $1.08 trillion as the decade closes.
- Despite lower credit card APRs thanks to three Federal Reserve rate cuts, consumers will pay only $8 billion less in interest payments annually than before the rate cuts took effect.
- Home equity remains largely untapped, even as home values increase. Personal loans, are still growing at a double-digit pace, and may soon eclipse the total home equity balance.
- There are more than two times as many personal loan borrowers as HELOC borrowers.
Holiday spending likely to tack on $18 billion to credit card debt
With the new year comes the holiday spending hangover. This year, it will likely add $18 billion to consumer debt, according to industry indicators, increasing total revolving debt balances to $1.08 trillion.
As of November 2019, Americans had a cumulative $4.16 trillion in non-mortgage debt heading into the holiday spending season. Credit card and other revolving debt accounted for $1.06 trillion of that amount, according to the latest Federal Reserve data.
Early indications suggest that holiday retail spending has increased by 3.4% in 2019 compared to last year, reported Mastercard SpendingPulse™.
Historically, overall holiday revolving credit balances have grown at about half the rate of the Mastercard SpendingPulse rate, so expect about an $18 billion monthly increase in December credit card debt. Over the past five years, December has resulted in an average monthly balance increase of $20.3 billion.
Interest rate cuts will slow interest payments owed on credit cards, but balances will still increase
Despite the lower variable interest rates of credit cards – thanks to three Federal Reserve rate cuts – consumers are still on pace to pay more in interest payments in 2019, and beyond. The reason: The typical credit card APR decreased by 0.75 percentage points since the summer of 2019. Collectively, however, the lower interest rate payments from the rate reduction won’t roll back the increase in balances.
The average monthly interest on $1.06 trillion will fall by about $600 million which will slow the increase in revolving balances, which have been growing an average of $3.4 billion a month since 2014. Everything else being equal, that means credit card balances will increase by an average of $2.8 billion monthly in the near future.
Personal loans are gaining on home equity loans as a preferred credit option
As secured lines of credit, home equity loans generally have lower interest rates than unsecured personal loans. But home equity loans – and in particular, home equity lines of credit (HELOC) – continue to decline, even as home prices and available home equity have increased. Personal loans, meanwhile, continue to rise.
Since 2015, home equity has increased by 48% to $18.7 trillion. Nonetheless, HELOC balances have declined by 27% over that same period. Mortgage and real estate industry analyst BlackKnight estimates about $6 trillion of home equity is accessible to homeowners.
Furthermore, the number of borrowers continues to fall. Only 8.6 million HELOC accounts are open, according to TransUnion, which trails other types of consumer borrowing.