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Why Retailers Should Be Worried About Rising Consumer Debt: Week Ahead

Inflation has U.S. consumers firing up their credit cards.

But that’s not necessarily a plus for fashion retailers. There’s been talk that people are spending less on anything beyond the basic necessities. And now many are relying on credit cards to pay for their daily goods.

Credit ratings firm Fitch Ratings notes that consumer and retail companies are usually the firms at most risk when it comes to debt defaults. Steady cash flow is needed to help pay down debt. A consumer spending pullback is something retailers need to be concerned about, especially either for those struggling now or who have a huge debt payment due in the next 12 to 18 months. And because the consumer retail landscape can change quickly, fashion firms shouldn’t rely on a strong holiday shopping season to help keep them afloat.

Retail is awash with discounts as retailers work to right-size their inventories. Some vendors are paring back on what they’re producing and keeping in stock. And there’s a chance that the discounting could continue through the end of 2022. Instead of shopping early, this could be the year when cash-strapped consumers might be better off waiting until the last minute to make their Christmas purchases to get the best discounts available. But that won’t be good for retail, since discounting will crimp merchandise margins.

And things could get worse for retail, depending on how much credit card debt affects consumer balance sheets.

U.S. household debt passed the $16 trillion mark in the second quarter of 2022, according to a report from the Federal Reserve Bank of New York on Tuesday. The report said that household debt rose 2 percent from the first quarter of 2022. And of the $16 trillion, $890 billion is attributed to credit card balances.

The data gets worse. Credit card debt rose by $46 billion from the first quarter, or a 13 percent increase year-over-year for the largest spike in more than 20 years. “Other balances, which include retail cards and other consumer loans, increased by a robust $25 billion,” the New York Fed said. In addition, total non-housing balances grew by $103 billion, representing a 2.4 percent increase from the previous quarter and the largest gain since 2016.

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The New York Fed also said consumers opened 233 million new credit card accounts in the second quarter, an increase from the first quarter and the highest seen since 2008.

Although the credit card delinquency rate remains at near historic lows, they are rising among those in the sub-prime and low-income borrowers.

According to LendingTree data, credit cardholders in New Jersey have the highest average balance at $7,872, while those in Kentucky have the least at $5,441. Anonymized data reports indicate that the national average card debt—bank cards and retail credit cards—of cardholders with unpaid balances was $6,569.

The average annual percentage rate for the first quarter was 15.13 percent, while the average APR for new credit card offers was 20.82 percent, according to LendingTree. And as interest rates continue to rise, that debt is getting costlier to pay down, leaving less in consumer wallets for discretionary spending at retail.