Consumers Pile on Credit Card Debt While Savings Slip

Retail has been in recovery since the pandemic crash. But now some data suggests that the industry may be facing increasing headwinds, which ultimately could be bad news for retail and the associated CRE property sector.

One is a resurgence of credit card debt. Banks have seen a huge uptick of credit card use, according to Federal Reserve data. Annualized percentage of change, seasonally adjusted, of credit card and other revolving credit plan use through banks was up 17.3% in February, the most recent comparative data available. 

When pulling together all types of organizations providing revolving credit, the total topped $1.103 trillion in April, an all-time high since at least 1968, as Fed data from the Federal Reserve Bank of St. Louis shows.

According to the Fed’s report, “Economic Well-Being of U.S. Households in 2021,” credit cards are almost ubiquitous, with 84% of adults having at least one last year. There are two general uses of them: convenience of payment with users clearing balances every month and those who carried a balance between months at least once last year. The split is about 50-50 between the two groups.

Another sign of potential problems is the consumer savings rate. According to data from the Bureau of Economic Advisors, personal savings, which was at 6% of income in January, fell to 5.9% in January, 5.0% in March, and 4.4% in April. 

The credit card usage and savings rates are disturbing from a consumer financial health view because, with the surge of pandemic relief funds, many were able to significantly pay down card balances and build up reserves. In 2021, says the Fed, 64% of people could cover an unexpected $400 expense with cash or cash equivalent. In 2020, that was only 56%.

Many are in worse shape than they were six or seven months ago, and inflation is hitting them hard. Real earnings after inflation in April were down 2.6% from the same month in 2021.

Retail is a critical sector. Consumer spending makes up close to 70% of GDP, but when income doesn’t match rising prices, the increases we’ve seen may largely be dealing with higher prices and not additional consumption. The trade-offs are difficult. Moody’s presents a rule of thumb that for each $10 price increase in a barrel of oil, gas at the pump goes up $0.25. Also, every additional penny in gas prices takes away $1.28 billion in annual consumer spending. If gas prices rose to $6 a gallon instead of the current—gulp!—$5, that’s 40 basis points off GDP growth.

This has the potential to do the retail industry real damage. There’s only so much that people can deal with higher food, energy, housing, and other essential costs. Consumers will substitute where they can to ameliorate the effects, but there’s only so much room to move about, and the more people rely on credit, the more their payments shift away from retail and toward financial services. Operators, developers, and investors in retail have to take a hard look at the trends and consider what their options might be if stores start to say they can no longer pay current rent levels.