My Thoughts on $1 Trillion of Credit Card Debt

Last week financial news outlets raised alarm bells on consumer credit card debt as it passed the $1 Trillion level.  

Let me start by saying that any and all credit card debt should be eliminated first in most situations. It is nearly impossible to get ahead financially while paying 15-25% interest on that debt. Credit card debt is no joke.  

But many have used this moment to suggest that the US consumer is overspending on an unsustainable path. “This can’t go on forever.” It may come as a surprise to some that it actually can go on forever.  

The $1 Trillion figure above is in nominal terms, meaning it has not been adjusted for inflation. And it certainly has not been adjusted for wages or overall wealth. If you are wondering if the debt is sustainable you need to know what ability the consumer has to pay those debts.  

While consumer debt has grown steadily over the past 20 years, the percentage of income needed to pay that debt has dropped. In 2003 credit card debt made up 33% of disposable income. In 2023, it is 21%.  

While the nominal value of credit card debt might be terrifying, the consumer is in a much better place to pay it down because of increased income over that same time. For example, if a household’s income grew from $75,000 to $125,000 AND their credit card debt grew from $20,000 to $25,000 over the past 20 years, they are in a much better financial situation today than they were 20 years ago with marginally less debt.  While they clearly have a glaring financial issue to address, they are by no means on the verge of financial ruin.

When you see headlines like this in the future, go back to your elementary math days and bring in the denominator! 

Happy Planning, 

Alex

This blog post is not advice. Please read disclaimers.