And it's not just credit cards. Auto loans have increased too, and experts disagree on whether that's good or bad.
Credit card debt is skyrocketing, and that’s making some people very happy.
National credit bureau Equifax reported yesterday that credit card debt is up 6 percent from a year ago — and say that means the economy is recovering.
“A rise in credit card debt indicates consumers are beginning to feel more confident about the economy and their personal finances,” says Trey Loughran, president of Equifax Personal Information Solutions. “Consumers responsibly accessing credit is a positive sign.”
Except they don’t really prove the “responsible” part. (The company also published a defense of auto loans for subprime consumers, which we’ll get to in a minute.)
Meanwhile, the Federal Reserve Bank of New York — using Equifax’s own data — came to a different conclusion. Publicizing the bigger-picture numbers for mortgage, student loan, auto loan, and credit card debt, the Fed says that total “household indebtedness” is up more than $117 billion from September. The Fed also points to increases in auto and student loan delinquency.
Check out our map of the increase in credit card debt across the country below. Then see our breakdown of where Equifax and the Fed differ — and what both of them get right.
Credit card debt is up — is that good or bad?
Good, says Equifax. People are confident, and the debt is OK because “utilization” is up less than 1 percent and still down 16 percent from its 2010 peak.
Utilization is the ratio of your debt to your credit limit, and Equifax says the small increase shows “restraint.” But how can there be more debt if people aren’t using credit cards as much? Obviously, they’re using credit cards more. Here’s what’s happening…
- More people want credit cards. The Fed says the rate of credit inquiries within the past six months increased by 4 million.
- As Equifax admits, now “lenders are more willing to issue credit cards to consumers, even those in the subprime credit category.” They’re moving back toward the old habit of handing them out like candy.
- More people with credit cards means a bigger total debt.
- Lenders are also raising credit limits, giving people more money to play with. “Aggregate credit card limits” are up by 0.7 percent this quarter, according to the Fed.
- That means “utilization” looks better even with the same debt. If you have a card with a $1,000 limit and you are utilizing 50 percent of that limit, that’s high. But if the lender increases your limit to $2,000, your utilization is now magically 25 percent. You still have the same amount of debt — it just looks better to the credit bureaus.
Between the increase in the number of cards out there and higher credit limits, more debt is being racked up. That doesn’t mean more people are spending excessively, necessarily — though giving credit cards to “subprime” people who haven’t had them before will lead to some of that. But it also doesn’t mean people are showing “restraint” like Equifax says, either.
Subprime auto loans are increasing — good or bad?
Last month several news outlets wrote about subprime auto loan debt, and how it might (or might not) trigger a repeat of the Great Recession, which was caused by subprime mortgages. Here’s NPR warning about the potential for “another subprime crisis,” if those loans aren’t watched carefully…
The number of Americans buying autos approached a record high last year … Auto dealers are extending loans to a growing number of people with weak credit, and more of them are having trouble making payments.
A few weeks later, here’s Equifax with a new report: “Subprime Auto Loans: A Second Chance at Economic Opportunity.” A choice quote…
Dire warnings that subprime auto lending is getting out of hand are generalizing the practices of predatory and poorly originated lending as the norm for all subprime lenders when, in reality, our data does not support those warnings … More than 25% of those who took out an auto loan in June 2010 improved their credit score by 100 points or more by June 2013.
The report looked at data for more than 210 million consumers over that three-year period, and says comparing subprime auto loans to subprime mortgages is apples-to-oranges. Nobody expects a car to gain value, Equifax says, and subprime loans provide a way for struggling consumers to get back on the road and commute to work. A car can also be repossessed real quick compared to a house.
Even if you give Equifax all that — we can at least agree that student loan debt is a bigger deal — their report is based on data that ended in June 2013. Look at the Fed report (which, again, is also from Equifax) and you’ll see auto loans are headed in the wrong direction. The 90-plus day delinquency rate for auto loans is now 3.5 percent, up from 3.1 percent in the last quarter. Total auto loan debt also increased $21 billion.
But we totally agree with this part of Equifax’s conclusion: “With only a few short years separating today from the depths of the Great Recession, it is natural and prudent to be skeptical of the recent increase in subprime auto lending. Nevertheless, it is imperative that this curiosity be answered with data and not anecdotes. Without question, vigilance is the watchword.”