Credit Card Debt at Record High

By Robert L. Cain

One trillion dollars.  That’s the expected credit-card indebtedness of US consumers by the end of this year, reports Wallethub.com, and that’s the highest credit-card debt EVER.  It will also run up the average amount owed by households to $8,500. Already in the second quarter of 2016, consumers have racked up $34.4 billion in credit-card debt, “the largest second-quarter debt buildup since at least 1986” when bankers first started keeping track.  The first quarter also resulted in the smallest “pay-down” since 2008, $27.5 billion.

Wallethub.com warns, “it is not a question of whether consumers are weakening financially, but rather how long this trend toward pre-recession habits will last and just how bad it will get.”  Let’s look at the somewhat perilous current situation and then extrapolate what the future credit situation might look like if indeed it worsens as much as wallethub.com assumes it will.

One trillion dollars, $8,500, and $27.5 billion are all just numbers, and numbers have no meaning in and of themselves, but let’s break them down to what they mean to one income group.  The income level with the most perilous debt is that one with an annual income of from $0 to $24,999.  Taking the middle number, $12,500, that is gross income of $1042 a month.  The Census Bureau reports that they account for 22.1 percent of the population, more than one in five people.  The average credit card balance is $3,000.  If we add in the folks who earn up to $35,000, it accounts for 32.1 percent of the population, almost one-third.  The average balance for this group for those who owe on credit cards, is $3900.  Those figures are a little misleading because they include the entire population in those income categories.  I’ll explain why that is important in a minute.

That’s interesting, but what does it mean in terms of disposable income, such as that for rent?  Bankrate.com has a nifty credit-card payment calculator that shows what credit card payments would be for varying amounts and interest rates. At 18 percent interest, a $3,000 balance would require a minimum payment of $75 a month, or 7 percent of income.  If someone misses one payment or is even late for a payment, as this group might be expected to do, the interest rate jumps to at least 29 percent.  You know how that works.  That would increase the monthly payment to $102.50, or 10 percent of income, a truly crippling amount.  Those are figures that bankrate.com used, and different banks use different methods of calculating minimum payments, sometimes meaning higher or lower minimum payments.

Compare that to the debt load of a household that earns between $70,000 and $115,000 a year, or $8,125 a month for the middle of that range.  Their average credit card debt is $5,800. They would have a monthly payment of $145 a month at 18 percent, about 2 percent of their income.  If their interest rate is 10 percent, as theirs could well be, their payment drops to $106.33, or 1.3 percent of income, hardly a crippling number assuming they don’t have considerable other debt such as huge car payments and mortgages.

As I mentioned above, these figures include everyone in the income ranges, even those who don’t have credit cards or credit-card debt.  So part of the average are those with $0 balances, and they can account for up to 61 percent of the income group, reports credit.com.  That means eliminate from the average 60 percent of the population, or six in 10 people.  That brings the average debt for those who have credit-card debt up considerably.  Run the calculation by dividing $3,000 by 39 percent and the balance for those who have credit-card debt in the $0 to $25,000 income range up to over $7600.  That brings the minimum payment at 18 percent interest up to $190 a month, or 18 percent of gross income, a truly crippling amount to pay.

Statisticsbrain.com reports that the average percent of disposable income that went to credit-card debt was 13.9 percent.  Remember, that figure includes people who have no debt.  They also report that 14.7 percent of families have debt that exceeds 40 percent of their income.

We can’t get absolute figures because of the varying methods of reporting both debt and number of people who carry a credit-card balance.

What all this means to those of us who screen applicants for either rental property or employment is that those who have the highest credit card debt relative to their income are most likely to default on payments, not just credit cards but all debts, such as rent, cars, utilities, and such.

Thus the importance of credit reports becomes more pronounced when screening for renting and hiring.  A renter with too much debt may decide that other bills are more important than the rent and try to beg off paying rent that month and maybe the month after and even the month after that depending on how lenient the landlord is.  An employer who hires someone with high credit-card debt can find that his or her employee has been evicted, had a car repossessed or wages garnished.  These folks might be the best employees and best tenants and the nicest people anyone could ask for, but if they can’t pay their bills, employers and landlords will suffer.

And using wallethub.com’s warning, it will only get worse.