Credit card balances recently ticked higher, but remain well below pre-pandemic levels. However, consumers are charging much more than those balances might suggest.
Why it matters: Higher credit card balances are considered a rough proxy for spending activity and consumer confidence.
By the numbers: According to the New York Fed’s Household Debt and Credit Report, credit card balances increased by $17 billion in Q2 to $787 billion.
- That's still below the $927 billion level before the pandemic in Q4 2019.
Between the lines: Those depressed levels belie the actual amount of spending consumers are doing with their credit cards.
- Credit card balances reflect a combination of revolving debt, which are the balances the consumers carry from billing period to billing period, and transactions, which are consumer purchases that get paid off right away.
- Typically, around one-fourth to one-third of outstanding balances represent transactions, New York Fed researchers explained on a call with reporters.
Yes, but: The researchers said there’s "no doubt" that most of the decline in the balances right now is due to borrowers reducing how much debt they were carrying, not how much they were purchasing.
- Also, recent government data confirms consumer spending activity is well above pre-pandemic levels.
Zoom out: The fact that spending is elevated while credit card debt is depressed can be explained by the massive savings accumulated during the early part of the pandemic.
- These savings have been inflated by stimulus checks, enhanced unemployment benefits, and a lack of opportunities to spend during the early months of the pandemic. New York Fed researchers say consumers redirected these funds toward paying down their debt balances.
What to watch: The researchers added that credit card applications are up and rejection rates are down. Furthermore, an increasing number of borrowers are getting approved for higher credit card limits.
- This is all associated with greater spending in the months to come.
The bottom line: Just because credit card balances remain depressed doesn’t mean consumers aren't spending. Rather, it’s the case that consumers have enough in savings that they can afford to carry smaller levels of debt.