Fed Finds 4% Increase in Consumers Revolving Card Balances

Overall consumer credit growth slowed in October, but the headline number masks a trend: households are shifting toward revolving credit as they manage day-to-day liquidity and holiday spending. Total consumer credit rose at a seasonally adjusted annual rate of 2.2% in October, down slightly from 2.6% in September, according to Fed data released Friday (Dec. 5).

Yet beneath that headline, revolving credit accelerated while nonrevolving credit cooled.

Revolving Credit Drives Borrowing Growth

Revolving balances reached $1.3 trillion in October and expanded at a 4.9% annual rate, up from 4% in September. Revolving credit includes credit cards, but is not limited to them. It reflects short-term borrowing behavior tied to household cash flow, discretionary spending and liquidity needs.  By contrast, nonrevolving debt slowed to a 1.2% annual rate in October, a drop from September’s 2.1% pace.

Nonrevolving debt largely captures auto loans and longer-term installment products. The gap between the two categories suggests that households are thinking carefully about long-term financed purchases while relying more heavily on credit card access heading into the holiday season.

Households Continue Borrowing At Higher Interest Rates

Interest rates remain elevated according to the Fed file.  Depository institutions remain primary contributors to credit expansion, while finance company activity has softened, especially across installment products.  The latest reading on interest rates charged to cards stood at more than 21.3%, up from 14.7% roughly five years ago.

PYMNTS Data Shows How Households Use Credit Limits

PYMNTS Intelligence data helps explain why revolving balances are gaining ground. Credit limits and access to card spending power shape how households plan, budget and borrow, especially during periods of higher prices.

Nearly four in 10 cardholders received a credit limit increase in the last year, and 56% of those increases happened automatically.   That means a large share of households did not even need to request more room on their cards. Yet when consumers do ask for higher limits, they face tough odds. Sixty-seven percent of cardholders who requested an increase were denied.   Seventy-one percent of cardholders say credit limits play a major role in financial planning, and 42% say limits are very or extremely important. Younger households and those who use a large share of their credit lines are most likely to feel this way.

Holiday spending generally increases revolving balances, and the Fed data confirms that short-term borrowing accelerated in October as the shopping season approached. Meanwhile, PYMNTS data shows that 52% of cardholders who requested a higher limit did so to improve financial flexibility heading into larger purchases. Even denials shape spending behaviors. After being denied, 31% of cardholders reduced their card use, and 20% applied for a new card with a different issuer. Cardholders denied increases are far more likely to turn to installment plans, including buy now, pay later, as an alternative source of credit.

The use of credit to manage everyday expenses and plan for future purchases may signal that households will spend more and rely on card rewards, at least through the holiday season, and make strategic decisions about which balances to carry into the new year.

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