Consumer Credit Is Soaring in the US. So What?

Americans have driven up their credit balances at a record pace this year. The doomsayers say this clearly shows that households are struggling in the face of the highest rates of inflation since the early 1980s and have no choice but to go into debt to make ends meet. The reality is not as dire. In fact, consumers’ finances are near the best shape ever, giving them a long runway until rising debt obligations become a problem.

It’s easy to understand the worry. Four of the biggest monthly jumps in consumer credit on record have come this year, with outstanding balances growing by an average of $33.1 billion a month over the past six months, according to Federal Reserve data. To put that in context the monthly average in all of 2019 was a little less than half that amount at $15.4 billion. The numbers are certainly shocking, but there are indications that they are mostly healthy and normal.

First, consider revolving credit, which includes credit cards. That form of credit contracted dramatically early in the pandemic as consumers had fewer options to spend and used excess savings and stimulus checks to pay down balances. Now, consumers are mostly just playing catchup, as the amount of revolving credit outstanding remains below the pre-pandemic trendline. If it blows past trend, that would indicate broader inflation-induced distress, but the financial system broadly isn’t even close to that point. Of course, many lower income households are suffering from the spike higher prices and are being forced to reach for their credit cards. But there’s no sign of a debt problem brewing broadly that could damage the economy.