Consumer Debt Outlook July 2018

Highlights

  • Revolving debt, almost all of which is credit card debt, increased by more than $16 billion in May. That’s the largest-ever increase in revolving credit for that calendar month and the largest percentage increase since 1995. The average credit card APR is currently 15.54%, a full percentage point higher than a year ago.
  • Federal deficits continue to increase and are expected to increase to more than 5% of gross domestic product (GDP) within the next five years. The persistent annual federal deficits will likely elevate borrowing rates for consumers on big ticket items like homes.
  • The average new car loan rate is above 5.00% for the first time since 2012. The amount owed on existing motor vehicles has increased by 48% since that time.
  • Consumers, at least in the short term, are better positioned to service these larger debts. Credit delinquencies remain low, and incomes are (mostly) keeping pace with the added debt.

Credit card balances new record increase $16 billion

The $16.25 billion increase in revolving credit — now totaling a shade under $1 trillion, at $999.2 billion — is the biggest one-month increase in May. On a percentage basis, the 1.65% monthly increase is the biggest May jump since 1995, when revolving credit jumped a whopping 2.27% in a single month.

Meanwhile, non-revolving debt, which includes auto loans and student debt, also increased. Together, we expect the $3.86 trillion in revolving and non-revolving debt to exceed $4 trillion by the end of 2018.

Federal deficit beginning to cast a shadow over consumer interest rates

June is the month when cash tumbles into the U.S. Treasury’s coffers from quarterly tax payments, and most years it offsets government expenditures for the month. But this year, income tax receipts couldn’t offset an increasingly widening deficit. The Treasury Department reported that the deficit this year increased to $607 billion through June. This time last year, the deficit was $523 billion, and in 2016 it was $397 billion. Currently, the federal government is expected to close the 2018 fiscal year in October with a deficit of over $800 billion.

The tie-in between the federal government’s pocketbook and our personal budget is indirect, but there is some relationship. When deficits increase, so can interest rates. An often-cited study found that for every percentage point increase in the deficit-to-GDP ratio, we can expect interest rates (as measured by the 10-year Treasury bond) to increase 0.25 percentage points.

So where are we now? Currently, the deficit-to-GDP ratio is 3.5% — a little above the 3% average deficit-to-GDP ratio for fiscal years since 1989. But forecasts for the deficit-to-GDP ratio are, depending who you ask, concerning or alarming. In the near term, the Congressional Budget Office expects the deficit-to-GDP ratio to increase to 5.1% in the next few years.

That alone would mean about an increase in 30-year fixed mortgage rates (a rate closely related to 10-year Treasury rates) by 0.4 percentage points. Of course, there are other, more direct and immediate effects on borrowing rates, such as Federal Reserve monetary policy — the Fed is expected to ratchet up interest rates in the coming months.

Auto loans back above 5%

The average rate to finance a new car is now above 5% for the first time since February 2012, according to Federal Reserve data, based on a 48-month loan.

The amount people are financing has also increased over that time. In 2012, the average amount financed was $25,430. Today, the average amount financed is $30,472 — a 20% increase. At the current average rate of 5.04% for 48 months, financing $30,472 of a new car means monthly payments of $702, according to LendingTree’s auto loan calculator. Over the life of that loan, the new car owner will pay more than $3,200 in interest.

Finally, the amount owed on all motor vehicles — both new and used — has increased by nearly 50% since 2012. Collectively, more than $1.1 trillion is owed on some sort of automobile financing.

Consumer income is keeping up (for now)

Despite the heavier lifts, Americans are, at least in the short run, keeping up. Delinquency rates on home loans are at 10-year lows, according to Federal Reserve data, and credit card charge-off and delinquency rates remain modest.