Over the course of a generation, credit cards have become America’s most popular payment method. The average American has six in her wallet. We spend trillions of dollars and take on billions of dollars of debt a year using hundreds of millions of credit cards. Credit card debt has increased almost one-hundred fold since the Federal Reserve began tracking the trend. In fact, last year credit card debt grew by over $92 billion. That’s the biggest credit card debt growth in a single year since the Great Recession and the fifth largest in over 30 years.
Some analysts view this appetite for debt as a financial bubble: a harbinger of the next recession.
Others feel there are good reasons for optimism. Sure. Credit card debt is at a record high, but so is the gross domestic product and unemployment is low. You could make the case that the growth of revolving credit debt — although not great news for the individuals carrying the debt — is indicative of a healthy economy. Delinquency rates are at close-to-historical lows, which is why lenders are not worried and are more than happy to increase the credit lines of cardholders. Naysayers could say that a growth in credit card delinquency followed the last four years credit card debt grew so quickly.
So what is the future for credit cards and what does it say about the economy as a whole. This report will take an in-depth look at the current state of the consumer credit market so you can make your own mind.
A brief history of credit cards
The concept of consumer credit is not a new one. Scholars believe that the first consumer loans were issued in 3,500 B.C. in Sumer. As Dr. Stephen Bertman explains in Handbook to Life in Ancient Mesopotamia, they even had their own “credit cards.” Except they were cylinder seals and were worn around the neck. The cylinder seals served as a personal guarantee during business deals. If a Sumerian lost his cylinder seal he would record the date and time with an official to prove that transactions made with it after the loss were no longer valid.
But credit cards didn’t come along until the 1920s when department stores and oil companies began offering metal charge plates to their customers to allow them to charge their purchases instead of paying for them upfront.
The modern credit card
In 1950, Frank McNamara took the next step toward the modern credit card when he started Diners Club. With his new company, he introduced the first credit card that was accepted by more than one merchant.
In 1958, well-known companies joined the fray, including American Express, Bank of America, and Carte Blanche. Bank of America marketed its competitor card, BankAmericard, in a publicity stunt called “The Fresno Drop,” where it mailed 60,000 activated credit cards to its Fresno, California-based customers.
The result, as you can imagine, was a flurry of fraudulent transactions and delinquencies. But the bank and its competitors learned from that mistake and continued to develop the industry.
Over the ensuing decades, the credit card industry made leaps and bounds. BankAmericard spun off of Bank of America and became Visa in the 1960s. Around that same time, a group of California-based banks started the Interbank Card Association, which later became Mastercard.
In 1986, Sears introduced the first Discover card, which became the first rewards credit card by offering cardholders a small rebate on purchases. Consumers and the competition caught on and, as we now know, the industry exploded.
Now, several credit cards offer several hundreds of dollars to consumers to entice them to apply. Most recently, the Chase Sapphire Reserve launched in late 2016 offering an impressive $1,500 worth of rewards to new cardholders as a sign-up bonus, setting a new standard.
These incentive programs, along with their general convenience, have catapulted credit cards into the most popular form of payment and credit.
Debit cards are the most popular method of payment
According to a study by TSYS, in 2016 credit cards surpassed debit cards as the most preferred method of payment (source). In 2017 debit cards regained their position as the overall most-popular payment method. Debit cards are preferred for small everyday purchases, while credit cards remain more popular for larger purchases.
Consumers with incomes higher than $75k prefer credit cards
Debit cards are the most popular form of payment for people with annual incomes under $75k. The tide switches with high-income consumers.
Credit cards are also the most popular source of credit
Based on a 2016 report that looked at the types of credit respondents applied for in the last 12 months, credit cards were the most sought-after type of credit.
The average household has six cards and $8,733 in credit card debt
Based on the Federal Reserve data and information from the Census Bureau, American households have an average of $8,733 in credit card debt. This is close to what Experian found in its 2017 State of Credit report, which shows an average balance of $8,195 for conventional credit cards and store cards combined.
Experian also found that consumers have an average of 3.1 credit cards and 2.5 retail cards in their wallet, making it easier to get into debt.
New Jersey is the state with the most credit cards per household
Alaska has the highest average credit card debt
Experian’s report also shows where consumers have the most and least credit card debt. For example, Alaska outpaces the rest of the country with consumers carrying an average balance of $8,515 on credit cards alone (retail cards not included). In contrast, Iowa residents carry $5,155 on average in credit card debt.
The APR on credit card accounts is rising
Credit card interest rates hit a new high of 14.99% in November 2017 (Source). That said, interest rates can vary wildly depending on which type of credit card you have, and it’s possible that this average doesn’t include the type of credit card that typically charges the highest interest rates: store cards. These cards often charge interest rates closer to 25%.
However, consumers should be wary of the fine print. There are two types of 0% APR promotions:
- Pure 0% APR: With this promotion, you’ll get a period of no interest, after which the interest rate increases. If you have a remaining balance, interest is assessed on the amount that remains from the original purchase or balance transfer. This type is more common with major credit cards that offer balance transfer promotions.
- Deferred interest: Store cards that offer 0% APR financing often offer this kind of promotion. While there’s a period of no interest, there’s also a set interest rate the card charges if you don’t pay off the purchase in time. The difference is that you’ll be on the hook for interest based on the original purchase amount, not the amount that’s leftover.
The credit card market is bigger than ever
The credit card market is one of the largest consumer financial markets in the United States and it continues to grow a higher rate than the overall economy. Credit card debt is now at pre-recession levels but purchasing volume with credit cards has skyrocketed past previous highs and is showing no signs of slowing down.
Consumers seem to be getting smarter about how they use their credit cards
Credit card purchase volume is increasing dramatically but credit card debt remains stable.
This would indicate that more people are being smart about how they use their credit cards. In other words, more credit card users are paying with credit cards for the rewards and protections, but repaying their balances before incurring interest. However, that doesn’t mean credit card debt is low.
Revolving credit card debt hits an all-time high… but so does GDP
Another source of debt that is growing is tax debt. Read this report for the latest statistics and insights in the tax debt relief industry.
Credit card debt growth is in lockstep with GDP
Some experts consider the new record a warning of things to come, considering the number hit $1.02 trillion in June 2008 as the financial crisis was taking hold. As America tightened its belt, total outstanding debt reached as low as $832.5 billion in April 2011 but has continued a steady rise since then.
However, today’s credit card debt total is about 5% of the nation’s gross domestic product (GDP). In 2008, that number was 6.5%, thus imposing a greater threat to the economy.
Credit card debt is not good for individual consumers long-term financial health. However, you need to look a bit deeper into these statistics to see how concerning it is for the economy as a whole. Total debt in absolute numbers typically grows with the economy, inflation, and population growth. Credit scores are currently very high, and a lower percentage of credit card users carry a balance than they did before the last recession, so the situation is not as concerning as the last time we were at this level of credit card debt.
Delinquency and charge-off rates are at record lows
As mentioned in the introduction, delinquency rates are low. Unusually so. In the final quarter of 2017, only 2.48% of credit card accounts were past due 30 days or more.This is fueling lenders appetite to further increase the credit line of cardholders. On the other hand, although delinquency rates are low they are increasing from the all-time low in 2015, which is concerning when you consider the growth in credit card debt.
Credit card banks are becoming less profitable
Credit card banks have seen a drop in their noninterest income — i.e. fees — and are now required to set aside more provisions for loan losses. This has caused a drop in profitability for major credit card issuers.
Consolidating credit card debt is the top reason borrowers qualify for a loan
SuperMoney generates tens of thousands of personal loan applications per month. The most popular loan reason among borrowers who get a pre-approved loan offer is debt consolidation. Credit card debt consolidation specifically makes up the large majority of debt consolidation loan applications.
Read this in-depth report of the consumer lending industry for the latest statistics and insights on the personal loans market.
The demographics of credit card debt
Let’s provide some context to these household averages by breaking down credit card debt and usage into more meaningful categories.
Families are now more likely to carry a balance on their credit cards but the amounts are smaller
The percentage of families who were carrying a balance on their credit cards came down significantly during and after the financial crisis. This is likely due to high rates of default, a reduction in the supply of credit, and a general sense of caution towards credit products that occurred in this period. However, in recent years we’ve seen that trend start to shoot back up.
The story here is nuanced. The percentage of families that carry credit card debt grew from a minimum of 38% in 2013 to 44% in 2016, but the median value of credit card debt dropped. It seems that more families are carrying a balance on their cards but for smaller amounts.
Couples with children are the most likely to carry a balance but couples without children are the biggest borrowers
Not surprisingly, couples with children are the most likely to carry a balance on their credit cards. However, they have they have the same median value credit card debt as couples without children.
College graduates have the largest credit card debts
Household heads with some college education are the most likely to carry a balance but those with a college degree owe nearly twice as much in credit card debt. A similar pattern appears when you look at the occupation of the family head.
Consumers working technical, sales or service jobs are more likely to carry a balance but managers and professionals owe $1.5k more
When looking at the data broken down by occupation, when the family head is in a managerial profession they are less likely to carry a credit card balance. But the balances they carry tend to be almost twice as high someone in a technical, sales, or service occupation.
Wealthier consumers are less likely to carry a balance but when they do the amounts are much larger
Income seems to be driving force behind this pattern, as the following graphs continue to show. Middle-class consumers are more likely to carry a balance than the 90+ percentile earners (53% vs. 20%) but the credit card debt balance is also $1.3k less, on average.
Self-employed workers are the biggest borrowers but they’re less likely to carry a balance than employees
Access to credit is another important factor. Lower-income consumers, especially the unemployed, are less likely to get approved and when they do the credit lines are typically low. Which explains why low income and unemployed consumers are the less likely to carry a balance. The issue of access to credit is also illustrated by the data on self-employed versus employees. All things being equal, self-employed workers are less likely to qualify for a credit card. Employees are more likely to have a balance on their credit card (50% vs. 46%) but their average debt amounts are lower.
Homeowners have larger credit card debt amounts and are more likely to carry a balance
Your credit score is a key predictor of access to credit. This is well illustrated by the differences between renters and homeowners. Renters are more likely to be younger consumers with lower incomes (source) and lower credit scores. They are also more likely to carry a balance (46% vs. 40%) and for larger amounts ($3k vs $1.3k).
Hispanics and African Americans are more likely to carry a balance on their credit cards but White cardholders are the biggest borrowers
Sadly, race is still a predictor of income and credit score disparities (source). This is also reflected in credit card usage and debt data. Hispanics and African Americans are more likely to have a balance on their credit card than White non-Hispanic consumers but the average credit card debt of White consumers with a balance is much higher ($2.7k vs. $1.7k and $1.4k).
Country folk and city slickers share their love for credit card debt and are equally likely to carry a balance
Credit card usage and debt do not vary much between urban and rural consumers, but it wasn’t always like that.
Millennials wisely trail behind their seniors in credit card debt
Generation X has the most credit card debt, according to the Experian report, followed by baby boomers and the silent generation. As irresponsible as Millennials are sometimes described, they come in fourth followed by generation Z, which doesn’t yet have good access to credit.
Here’s a breakdown of the average credit card debt for each generation:
Millennials prefer debit over credit cards
Millennials tend to prefer debit over credit, according to several polls taken over the past few years. For example, Chime Bank found that of 70% of Millennials would rather use a debit card for their purchases.
Part of this can be attributed to the world that Millennials grew up in. In 2008, when the financial crisis hit, consumer debt hit a staggering 127% of disposable income. So, while it’s easy to blame the big banks for causing the Great Recession, Millennials know that their parents also had a hand in the crisis.
Another reason for this is the student loan crisis that seems to continue to get worse. According to the Pew Research Center, the median student debt burden for bachelor’s degree holders is $25,000. And postgraduate degree holders are on the hook for $45,000.
With such a high student loan balance at graduation, it’s no wonder Millennials are afraid to add to it.
The majority of Americans have great credit
Credit limits are determined by your credit score but there is some wriggle room
If you’re applying for a new credit card, there’s no guarantee what your credit limit will be. Unlike with other loan types, credit card companies don’t share this information upfront. But according to the American Bankers Association (ABA), you might be able to estimate how much you qualify for based on your credit score.
Based on data gathered from the credit card industry, the ABA found the following average credit limits on new accounts based on VantageScore ranges:
- Super prime (781 to 850 credit score): $10,396
- Prime (661 to 780 credit score): $5,692
- Subprime (500 to 600 credit score): $2,566
Keep in mind that some lenders are willing to give higher credit lines than others. If you don’t get the credit limit you need, consider calling and requesting a credit line increase. Some issuers, like Capital One, even offer automatic credit limit increases on their cards targeted to people with bad or average credit.
There’s a new set of credit card priorities. Forget balance transfer options. Show me the rewards.
The rewards offered by credit cards are increasingly important to users. Balance transfer options and card brand, on the other hand, are becoming less important to consumers.
While some personal finance experts, including money guru Dave Ramsey, consider credit cards to be a one-way ticket to debt town, data shows that the majority of credit card holders don’t carry a balance.
According to the ABA’s Credit Card Market Monitor, just 43.7% of credit card holders are considered “revolvers,” meaning they carry a balance from month to month. The Federal Reserve found similar data in a 2016 report when it reported that 46% of adults with a credit card reported that they were carrying a balance.
In contrast, the ABA states that 29.1% of credit card holders are “transactors,” meaning they pay off their balances in full each month, and 27.2% are “dormants” who didn’t use their credit cards at all in the previous quarter.
Prepaid debit cards compete with credit cards, particularly among Millennials
Because Millennials continue to shy away from credit cards, prepaid debit cards have emerged as an alternative payment method. In 2006, prepaid cards accounted for 3.3 billion transactions. In 2015, that number was 10.6 billion.
Some prepaid debit cards have even started to offer credit card-like perks, to entice consumers to make the switch. For example, the American Express Serve Cash Back offers 1% cash back on every purchase you make. Others have started to offer benefits like purchase and price protection, perks that previously were reserved only for credit card holders.
Debit and prepaid cards are a simple way to avoid debt, which explains their popularity among those who grew up during the Great Recession and credit crisis. However, if you can keep your impulse spending in check and you’re responsible with your finances, consider credit cards, if only as a way to build their credit and qualify for a future home or auto loans.
What does this all mean for the future of credit cards and credit card debt?
It’s impossible to know for sure how the credit card industry will change in the future. There are, however, some indicators worth considering.
In the short term, credit card usage and debt will continue to grow
Credit cards are the most popular source of credit and payment method. We are currently in a golden age for credit card users with prime credit scores. Credit card issuers want to maximize on low delinquent rates and the growth of credit card purchasing volume and are aggressively courting power users with generous signup bonuses, rewards, and perks.
Growth may become unsustainable if interest rates and credit card debt continue to rise
Interest rates are rising which could put pressure on consumers who carry a balance. The credit card debt growth and the recent uptick in delinquency rates may be partially due to this.
Credit card usage may plateau as Millennials grow older
Millennials are not as enamored with credit cards as previous generations. If this attitude continues, credit cards may lose ground to debit cards and mobile payment options as Millennials gain a more dominant position in the market.
For now, credit cards remain the best option for consumers with prime credit scores who are good at managing their finances and can resist the urge to overspend. It’s hard to compete with a payment method that offers generous rewards and large signup bonus for simply buying the stuff you regularly purchase.
Click here to learn about the best deals currently available in the credit card market and compare offers side-by-side.