There was a spending binge, the likes of which we’ve seldom seen in the U.S.: People were shopping on Amazon more than ever, ordering food delivery daily, burning through those COVID relief checks so many folks were getting, and interest rates were low.
Back in COVID days, credit cards got a serious workout. Lots of folks felt like they could make minimum payments and live the high life – but now it seems like the party is over.
Imani Moise, personal economics reporter for The Wall Street Journal, dives into this in a new story, Americans Pull Back from an Epic Credit Card Binge. She joined Texas Standard to discuss.
This transcript has been lightly edited for clarity:
Texas Standard: You report that in the waning days of the pandemic, credit card balances across the country got as high as a trillion dollars. Seems like America’s relationship with revolving credit went through something of a transformation. What was that about?
Imani Moise: Absolutely, so that $1 trillion that you’re talking about is the cumulative balances. So that is everyone’s credit card balances combined and how much they’re spending month to month.
And part of the reason that we saw balances get so high is because banks were extending so much credit. Because an interesting fact about that is that utilization, so the percentage of overall credit that consumers are using, hasn’t really changed much. It’s just people have so much more access than they did a few years ago.
I would imagine that part of that was driven by the fact that some of these credit card issuers knew folks were getting stimulus checks and it kept a lot of people afloat during some hard times, but is it clear how much of a role those stimulus checks had on how people were spending money and using their credit cards?
It’s definitely safe to say that people spent more after the stimulus checks, but it’s hard to quantify exactly how much of the rapid increase in spending is directly correlated to that, just because we have seen spending continue to grow even after those stimulus payments have been spent away.
So it just came to be a mindset where people got used to spending a lot of money, and once they’re used to that it’s harder to dial that back.
But something that you point out in your article for the Wall Street Journal is that credit card spending, even though it continues to grow, it’s growing more slowly than debit card spending. Since when? At least late last year, right?
Yeah, since the fourth quarter of last year, and that is the first time in almost four years that debit card spending has outpaced credit card spending.
That means, you know, for the last four years coming out of the pandemic, people were spending more, they were growing their credit card, spending a lot more quickly than they were growing the spending of the money that they actually have in the bank.
Interesting. Now, decode that. What do you think brought so many consumers to that sobering conclusion that they should use their debit card more frequently and their credit card less frequently?
I think it’s definitely a more cautious approach to your spending. If a company, for example, is expecting good times ahead, they’re more likely to take out a loan to expand their business, right? But if they’re not so sure, maybe they’re going to lean on their cash reserves.
And for consumers, it’s really the same thing. So maybe they are a little bit more skeptical about the future or maybe they were watching their bills add up.
I spoke with one consumer who said that all of a sudden she turned around and her credit card payments were more than her mortgage and her car note combined. And that was her kind of come-to-Jesus moment when she realized she had to make a change and pay that down.
» GET MORE NEWS FROM AROUND THE STATE: Sign up for Texas Standard’s weekly newsletters
It’s surprising to me that you don’t see the cumulative effect of that happening until abracadabra, you know, you have a payment as you were describing that’s more than your mortgage and utilities and all that combined.
How do you get to that point? Part of this, I can’t help but think, has to do with the fact that interest rates have been creeping up and folks aren’t really paying attention to what that’s doing to their balances.
You nailed it. Definitely interest rates getting higher, which means that minimum payments are much higher than they used to be, which means it’s harder to make the same payments and watch your balance go down at the same rate.
The other thing that you mentioned was that people aren’t paying attention. Actually, statistically it’s shown that most people have an avoidant attitude when it comes to their finances.
Like most people aren’t in a spreadsheet budgeting every single dollar. They know about how much they should spend, but if you’re not paying that close attention, you kind of drift.
There’s this thing called lifestyle creep, which a lot of people saw during the pandemic. You start spending more, and if you don’t have that routine of going back, checking your statements, and actually making sure that you’re on track with your savings or debt repayment goals, it’s really easy to get off track.
How far has this new, more sober outlook on personal finance taken root? I would imagine that a lot of people would want to pay down their credit cards.
What are folks doing? Taking out personal loans and trying to consolidate debt, or are we seeing that?
Yes, we’re starting to see a pretty big uptick in personal loan originations. And the primary use for that is to consolidate high-interest credit card debt.
In the most recent data from TransUnion, that was up 18% year over year, which means a lot of people are taking a hard look at their finances and realizing that they need to make a change.
On balance, good thing for the economy writ large? I would think it would be at least a smarter way forward for a lot of consumers.
It depends on who you talk to. Maybe the retailers aren’t so happy that people are being more conservative, perhaps spending less, or if you’re a travel company.
But in the long run, yes, consumers making more responsible decisions will be beneficial for the economy as a whole.
