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Credit Card Debt Is Piling Up. Should Retail Be Worried?

Consumers are back to racking up debt after cutting down their credit card bills by $82 billion last year.

WalletHub projects a $70 billion spike in credit card debt this year, which would “far exceed” the 10-year average of $45.6 billion.

The consumer credit data firm also found that the third quarter’s $23.6 billion credit card debt increase came in 46 percent above than the post-Great Recession average for Q3. Moreover, the three-month period’s outstanding credit card debt increased by 2.1 percent versus the previous quarter.

Consumers’ total third-quarter credit card debt jumped 2.9 percent to $951.6 billion, up from $924.9 billion. The average household held $8,006 in credit card debt in the third quarter, a 2.7 percent decrease from $8,230 in the comparable 2020 quarter.

But additional data dating back to 2010 indicates a troubling new trend. From 2018 to 2020, consumers paid down their debt in the fourth quarter. That could change this year, as consumers have continued to spend, and though fourth-quarter numbers aren’t out of year, the trajectory suggests that Q4 will show little progress on debt reduction. In during the first three quarters of both 2011 and 2014, when consumers leaned on credit cards to increase their spending, the years ended with the fourth quarter following the same pattern.

The findings dovetail with retailers that have reported strengthening sales and earnings after last year’s lockdowns loosened up. On top of that, consumers trimmed debt last year and padded savings, so much so that the National Retail Federation said consumers “responded with a growing eagerness to kick off the holiday shopping season” as early as October and were expected to “carry that momentum through the last few weeks of the year.”

NRF had forecasted an increase in holiday retail sales in the range of 8.5 percent to 10.5 percent over 2020, for a total haul of $843.4 billion to $859 billion.

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But now retail is considering the aftermath of a solid holiday and a rise in consumer spending and higher credit card debt.

Inflationary concerns and a possible rise in interest rates come March when the Federal Reserve tightens monetary policy could put the brakes on spending for some consumers. What’s more, the surge in Omicron-fueled coronavirus cases could dampen spending even sooner.

And credit reporting agency TransUnion has forecasted that the auto, credit card and personal loan sector will continue to expand into the non-prime segment—the subprime and near prime risk tiers—of the market. That’s a scenario that could mean a continued bump in spending initially, but what it might mean for retail down the road is another question mark.