Sean Vanatta is a senior lecturer in financial history and policy at the University of Glasgow, and author of the book Plastic Capitalism on the history of credit cards.
An odd thing happened earlier this month: US credit card debt declined.
To be more precise, the Federal Reserve’s G-19 consumer credit series, released on August 7, showed a decrease from May to June in seasonally adjusted revolving consumer credit owned, essentially a measure of aggregate US credit card debt.
OK, it was actually the second decline this year, but the June fall was the sharpest in three years and these were the first two declines since 2021. For the sake of this hook, let’s just agree that credit card debt went down.
This decline is remarkable because, for the past three years, credit card borrowing has been on a tear. From April 2021 to May 2024, revolving consumer debt jumped from $971bn to $1.35tn. That’s a 39 per cent increase over just three years, the largest increase ever to the highest level ever.
The US economy has been booming too, but at roughly half that rate, up about 23 per cent over the same period.
All this borrowing hasn’t come cheap. In the mid-1990s, the Federal Reserve began measuring the average rate paid across all US credit card accounts. Over the past year consumers have been borrowing at the highest rates ever recorded.
FTAV brings this all up in part because the slowdown in consumer borrowing aligns with growing evidence for a bumpy economic landing after two and a half years of tight Fed policy.
As goes the consumer, they say, so goes the US economy. If households are borrowing to buy less, it probably tells us something meaningful about their sentiment and outlook for the future. But first, how did we get here?
The economic story is straightforward. The first piece is obviously inflation: As the price of goods increased faster than wages, American households borrowed to make up the difference. The uptick in US inflation began in earnest in April 2021, the same month credit card borrowing began to ratchet up.
We can also layer in a bit of vibe: The rise of borrowing also tracked the vaccine rollout and the resumption of semi-normal economic life. Having shed the fear that we were all going to die, we can speculate that many saw no reason not to spend like there was no tomorrow. (Cliché, sure, but come on, you know it’s true.)
This combination of exuberance and inflation brought on the third factor: The Federal Reserve began tightening in March 2022 and notched rates up steadily until July 2023. With credit card contracts indexed to the fed funds rate or similar benchmarks, this brought on a rise in card rates as well. (In fact, card rates increased more than other market rates, a point we’ll come back to.)
Higher interest costs led to higher monthly payments for credit card borrowers, making it harder to pay down accumulating balances. Total monthly interest payments roughly doubled from $12bn in April 2021 to $24bn three years later. In the aggregate, that hurts.
So that’s what happened. What does it mean?
Clearly it means that more households are struggling under high interest debt, which tends to put people in a lousy mood. Why have Americans been so gloomy about an economy that has been objectively booming? Maybe at least partly because their high-interest credit card balances were ballooning even faster.
In a narrow sense, it’s hard to blame the $370bn spike in credit card debt on the Biden administration (though the case can be made that as a longtime senator from Delaware — the state where most of the credit card banks are based — and as a supporter of the 2005 federal bankruptcy law which made it harder to discharge consumer debt, Biden bears some responsibility). Nevertheless, it’s a spot on the administration’s record, which might be contributing to the surge of American economic populism.
In a broad sense, though, the surge in borrowing reflects the failure — in the Biden administration and across a longer horizon — to rethink the US economy’s reliance on household borrowing to drive consumer spending and economic growth.
Since the New Deal in the 1930s, policymakers put household borrowing at the centre of their vision of US economic prosperity (think home mortgages, car loans, major appliances purchased on credit). Credit cards emerged on the back of these commitments, first in department stores and later through banks and bank card networks. Cards made credit convenient. They vastly expanded the world of things Americans could borrow to buy.
Crucially, until the early 1980s, consumer borrowing was also fundamentally restrained, especially by strict state-level interest rate caps that fixed the rates lenders could charge. Most importantly, interest rate limits shifted interest rate risk on to lenders and thus discouraged long-term consumer indebtedness.
This system of restraints ended in the early 1980s, in a context not unlike that which we’ve recently experienced.
To simplify, in 1979, at the height of a painful inflationary episode, Fed chair Paul Volcker dramatically raised interest rates. Banks like New York’s Citibank, then and now one of the largest credit card issuers, had borrowed heavily at variable rates to finance cards subject to rate ceilings. Market rates skyrocketed, the rates Citi could charge cardholders stayed flat, and Citi faced insolvency.
In response (as I document in my recent book), Citibank orchestrated a state-level deregulation of consumer credit interest rates, effectively eliminating interest rate risk and enabling the massive expansion of US credit card debt in the years after. Credit card debt went up and up and up and up.
The endurance is a bit surprising. To zoom out a bit, we can see an almost uninterrupted rise in credit card debt from 1980 until the 2008 financial crisis. The tide ebbed and rose again, retreated with Covid-19 and then rose faster still. Despite the financial crisis and the coronavirus shock, we’re still in the world Citibank made, where not just consumer borrowing but expensive consumer borrowing drives the economy.
This is where the balance of power in the credit card market comes in, in the past and in our present.
With deregulation in the early 1980s, card issuers raised their rates, and then kept them high through the early 1990s, even as market rates declined. In the American Economic Review, economist Lawrence Ausbel asked why there was no competition in the credit card market. Chuck Schumer, then in the House of Representatives, asked the same question in the Washington Post in 1986, arguing that:
The credit card industry represents what economists call an oligopoly, an industry where a few large sellers determine the price of goods, in this case credit. Card issuers understand that if all rates are high, all the banks win, because they already have plenty of customers and plenty of profit. But if a couple of banks lower rates, all the banks will have to do so, and each will lose its excess profits.
More competition arrived in the 1990s (indeed, the Fed likely started publishing credit card rate data to make prices more transparent and competition more effective). But more recently, card rates have stayed high even when money market rates move down.
As the Consumer Financial Protection Bureau has shown (using the prime rate as its reference), the difference between money market rates and credit card rates have gradually increased since the mid-2010s. The difference, of course, is profit, and cards have long been one of the banking industry’s most profitable lines of business.
The historical evaluation, then, is not that the Biden debt boom is an outlier. We’re on trend. Whether that should bring us comfort is another matter. If there is a recession then credit card debt will shrink further. But the long-term trajectory seems clear.
