Credit Zombies

Story Notes:

• Credit card delinquency rates have moved higher, and Americans are using credit cards more than ever to make basic purchases.
• Though delinquency rates are higher, they're still below the 10-year moving average.
• Higher consumer borrowing rates historically have not led to poor economic growth or stock returns.
• Increased credit card usage merely reflects increased benefits to using credit cards.

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The death of American consumers has been declared so many times, it's a wonder there are any of us left who aren't actual zombies. And yet, somehow, despite the constant pronouncements Americans are "tapped out" and "over-indebted," wages continue to grow as do Americans' per capita net worth—hitting all time highs! (See "Feel the Flow," 12/11/2007.)

Today's obituary comes in the form of this article:

Credit-Card Pinch Leads Consumers to Rein In Spending
By Robin Sidel, Sudeep Reddy, and Jane J. Kim, Wall Street Journal
https://online.wsj.com/article/SB120243324726552445.html?mod=todays_us_page_one

The article points to a 7.6% delinquency rate from Risk Metrics—but note, they only analyzed securitized debt. Generally speaking, any securitized debt will have higher delinquency rates than debt held on companies' books. Looking at system-wide data from the three largest credit cards, overall delinquency rates are trending up recently—as has been widely expected for over a year. But delinquencies are still below the 10-year moving average. Delinquency rates were much higher in 1997 and 1998—a perfectly fine time for stocks. And, they were actually lower at the end of 2000—a pretty bad time for stocks. This uptick is similar to the one between 1994 and 1997—again, a fine time. There's nothing troubling about today's level of credit card delinquencies and they certainly aren't predictive of stock returns.

The article also cites a growing usage of credit cards for purchasing groceries, gasoline, and other basics. But does that portend ill? In our increasingly digitized world, folks transact business differently. Ten years ago, folks still wrote checks at the grocery store. Today, if you pull out your check book you'll face the wrath of those waiting behind you.

Further, rebate and point programs are much more popular now—likely a major reason for increased "basic usage" spending. Some cards even provide a "cash back" feature. If you can earn points and airline miles, why not use the card for groceries? Plus, many credit cards have insurance features. You've seen the commercials—a guy accidentally drops his laptop in the bathtub, and the wife asks, "Did you buy it with XYZ credit card?" because XYZ credit card insures purchases against theft, damage, and stupidity.

The increased usage of credit cards makes the numbers seem larger, but it represents a shift in how Americans choose to pay for their purchases. It's just not true Americans are "drowning" in credit card debt. Maybe some individuals are—but there are plenty of folks who pay off their entire credit card balance every month as well. It's a quirk of human behavior that we see a few troubled individuals and assume everyone is similarly afflicted instead of looking the vaster numbers of those who handle debt just fine, and know that's really how most of the world works.

We've seen delinquency levels this high and certainly higher, and it hasn't augured unending doom. Despite dour headlines, consumer spending remains firm. Unless we're all prepared to give up our airline miles, we shouldn't fret increased credit card use. In fact, you'll be glad you didn't next time you drop your laptop in the bathtub.