There’s been a big uptick in consumer debt this spring. The Federal Reserve reports that consumer credit in April rose by nearly $18 billion, or 4.3% on an annualized basis. That was a lot more than expected, and the biggest increase this year.
“Consumer debt” includes credit cards, car loans, personal loans and student loans. Historically, consumer debt has tended to decrease at the beginning of the year, as people pay down what they charged up for the holidays, and tax refunds flow in. Then in the spring, spending on credit tends to pick up again.
This spring, there’s an added factor: consumers spending and charging more on credit cards ahead of expected price hikes from tariffs.
You might think with all the consumer angst about high prices and a brewing trade war that Americans would avoid racking up a lot of debt they’ll have to pay back at high interest later.
But no, said Bankrate financial analyst Greg McBride.
“Even though households budgets are tight and there’s a lot of concern about inflation, unemployment’s still very low. So the fact that there’s a steady paycheck coming in does support a continued level of spending,” he said.
Charges on credit cards soared in April, which is not necessarily a problem, said banking analyst Alexander Yokum at CFRA research.
“As long as people are paying it back, credit card companies are actually pretty happy right now. If they were concerned about the consumer, about credit quality, you might see competition falling. But marketing budgets have been high,” he said.
Loan delinquencies have now risen above historic averages, which Yokum said isn’t a big problem, right now.
“One reason why these companies aren’t struggling is they’re charging more on credit card loans. So they can actually afford to take more losses, because they’re getting more in interest,” Yokum said.
There is growing distress at the lower end of the market, said Bankrate’s Greg McBride.
“Consumers with weaker credit histories, lower income, that’s where you’re seeing a much higher level of delinquencies on credit cards, particularly on auto loans — $700- or $800-a-month payments — you miss more than one or two, it’s not going to be sitting in the driveway in the morning,” he said.
Meanwhile, as more tariffs kick in, inflation will start rising again, said RSM economist Joe Brusuelas.
“That’s a real problem. In working-class households people are doing buy-now-pay-later for groceries. When I was a child in the 1970s my parents had to use those layaway programs to buy groceries and holiday gifts. So I understand this in a very intuitive way,” he said.
Higher inflation will also deter the Fed from cutting interest rates. Meaning, 20%-plus interest on credit cards is likely to stick around for a while.
