Americans Ran Up Even More Debt to Pay for Christmas

Christmas 2024 was brought to you by Visa, Mastercard, et al. Was this the last gasp of an American consumer buried under mountains of debt?

Retail sales were strong in December (up 0.7 percent). Economists and pundits lauded the "strength" of American consumers and their willingness to spend for the holidays. But based on the December consumer credit report, much of that spending was put on credit cards.

That doesn't exactly scream "strong."

After falling off a cliff in November, consumer debt grew by $40.8 billion in December, a 9.6 percent increase, according to the latest data by the Federal Reserve.

Americans are now buried under $5.15 trillion in consumer debt. 

The Federal Reserve consumer debt figures include credit card debt, student loans, and auto loans but do not factor in mortgage debt. When you include mortgages, U.S. households are buried under a record level of debt. As of the end of 2024, total household debt stood at $18.4 trillion.

Revolving credit, primarily made up of credit card balances, grew by $18 billion in December, a 20.2 percent increase. This came on the heels of a big decrease in revolving credit in November. It appears Americans paid down credit card debt in November only to run it back up again for the holidays. 

Americans currently owe $1.38 trillion in revolving debt.

The double whammy of rising debt and interest rates exacerbates the debt problem. The average annual percentage rate (APR) currently stands at 20.10 percent, with some companies charging rates as high as 28 percent. That's only slightly down from the record high of 20.79 percent set in August.

Rates aren’t coming down much even with Federal Reserve rate cuts. According to an ABC News report, despite a full percentage point in rate cuts, credit card companies are charging a higher margin "to weather default risk, cover overhead costs and recoup profits, experts added."

"Credit card rates are high, and they're staying high," Bankrate analyst Ted Rossman told ABC News. 

The Fed's recent pause in rate cuts is more bad news for consumers buried in debt.

The big jump in credit card spending broke a recent trend for declining credit card use, often the prelude to a recession. However, there is some indication December spending was an anomaly. Retail sales cratered in January, falling by the largest amount in nearly two years. 

Meanwhile, according to the New York Fed, "Aggregate delinquency rates ticked up 0.1 percentage point (ppt) from the previous quarter to 3.6 percent of outstanding debt in some stage of delinquency."

Subprime credit card borrowers are struggling the most, with delinquency rates nudging upward by about 5.6 percent since the Federal Reserve began raising rates to battle price inflation. 

Despite strong retail spending in December, the bigger picture reveals a consumer under stress. 

Non-revolving debt, primarily reflecting outstanding auto loans, student loans, and loans for other big-ticket durable goods, increased by 5.8 percent in December, also breaking a trend. Non-revolving debt rose at a relatively tepid pace of under 2 percent for most of the year as consumers cut back on big-ticket spending to cover the increasing costs of day-to-day necessities.

We will have to wait for the January data to see if the Christmas spending was a one-off last-gasp spending spree, or if Americans still have some space left under their credit card limits. Regardless, credit cards do have a limit. An economy run on Mastercard and Vise simply isn't sustainable.

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