Post-Covid Spending Pushes Credit Cards to $1 Trillion

The maiden voyage next January of the 250,800-ton cruise ship, Icon of the Seas, with 20 decks of candy-colored amenities, has sold out. The Cruise Lines International Association predicts the industry’s 2023 passenger volume should exceed 2019 levels.

Cruises, after going over a financial cliff during COVID, are back! And so is the credit card debt that pays for cruises.

Travel in the form of hotels, airline tickets and cruises, and retail sales of everything from household appliances and glassware to restaurants – these are just some of the ways Americans are continuing a post-COVID spending spree fueled by more than a year of rock-bottom unemployment.

Consumers racked up $45 billion more credit card debt in the second quarter, pushing their total unpaid card balances to $1 trillion for the first time. 

Along with rising debt, delinquencies have gone back up. First, some history: card balances and delinquent debt plunged in 2020 as COVID spread and Americans hunkered down in their homes to protect their health.

As the New York Federal Reserve explains in its second-quarter update: “borrowers were in a better position to repay” their credit cards in the pandemic because spending for activities such as travel was limited and Congress had given them a generous package of financial assistance and a break on paying their student loans.

But spending bounced back fairly quickly, and the credit card debt has piled up. Two groups in particular are straining to repay their balances: young adults and low-income workers. Late last year, the delinquency rate for adults between ages 20 and 39 bumped up against the 3.5 percent average during the 2008 financial crisis, though it has dropped quite a bit recently, according to the Federal Reserve Bank of St. Louis.

Unpaid credit cards may be one factor in Northwestern Mutual’s recent report that Millennials’ and Generation Z’s financial stress levels were so high early this year. More than half of Millennials and 44 percent of GenZ said financial anxiety was keeping them awake at night.

The 40- to 59-year-old borrowers are a little better off but credit card delinquencies, at just under 3 percent, are close to financial crisis averages, as are the 3.5 percent delinquency rates for workers in the country’s low-income zip codes. 

But are these rates too high? Not necessarily. They remain well below the peak rates around the financial crisis, and the New York Fed sees indications they have begun to stabilize.

Context is also important. In contrast to the Great Recession, the job market is strong. As long as unemployment is low, borrowers should be able to keep up with their payments. On the other hand, the Sept. 1 resumption of student loan payments will further stress those younger adults who will have to juggle the college debt with credit card payments.

“There is little evidence of widespread financial distress,” the New York Fed concluded. Not yet anyway.  

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  This blog is supported by the Center for Retirement Research at Boston College.