• Consumer credit card spending has surged to unprecedented levels, according to Kevin Hassett, former chair of the Council of Economic Advisers.
  • Rising inflation and high interest rates are driving households to rely more on credit, raising concerns about debt sustainability.
  • The trend reflects broader economic pressures, with consumers grappling with stagnant wage growth and elevated living costs.

Spending Surge Signals Strain

Credit card spending is skyrocketing, with no signs of slowing down. Kevin Hassett, a senior economic advisor, described the trend as "through the roof" in a recent interview, highlighting a sharp acceleration in consumer borrowing. Data from the Federal Reserve shows revolving credit, which is primarily credit card debt, jumped 8.5% year-over-year in the latest quarter, reaching a record high of $1.3 trillion. “It’s a clear sign that households are leaning heavily on plastic to make ends meet,” Hassett said.

The surge is not evenly distributed. Lower-income households are bearing the brunt, as essential expenses like food and rent outpace wage gains. According to a recent survey by the Federal Reserve Bank of New York, nearly 40% of credit card users carry a balance from month to month, up from 35% a year ago. “We’re seeing a bifurcation: high-income consumers are still spending freely, but middle- and low-income borrowers are maxing out their cards,” said a senior economist at Moody’s Analytics.

Implications for the Economy

The spending boom is a double-edged sword. On one hand, it supports near-term consumption, which remains the backbone of the U.S. economy. On the other, it raises red flags for financial stability. With the Federal Reserve holding rates at 5.25% to 5.5%, average credit card APRs have surged to over 22%, the highest in decades. This creates a vicious cycle: as balances grow, so do interest payments, squeezing disposable income further.

Policy makers are taking note. The Consumer Financial Protection Bureau is reportedly considering tighter rules on credit card late fees, part of a broader crackdown on junk fees. “We’re monitoring the situation closely,” a CFPB official said, requesting anonymity because the matter is ongoing. Meanwhile, card issuers are tightening lending standards, with approval rates for new cards falling to 66% in April, down from 72% a year earlier, according to Bankrate.

Context and Outlook

The current trend echoes the years leading up to the 2008 financial crisis, when consumer debt levels also soared. However, analysts say the key difference is that banks are better capitalized today, and household balance sheets are stronger overall, thanks in part to pandemic-era savings. Still, those buffers are rapidly depleting. The personal savings rate fell to 3.1% in March, its lowest level since 2022.

“Without a policy adjustment, we could see a wave of delinquencies later this year,” warned a credit risk analyst at JPMorgan Chase. Delinquency rates for credit cards have already risen to 3.2% in Q1 2024, up from 2.8% a year ago.

Correction: An earlier version of this article misstated the year-over-year growth rate for revolving credit. The correct figure is 8.5%.