Household Debt Hits $18.6T, but Strong Credit Consumers Keep Payments on Track

According to the New York Fed, total household debt was $18.6 trillion in the third quarter, an increase of $197 billion from the second quarter. Most of the increase was from mortgage debt and revolving credit. Credit card debt was up by $24 billion from the spring levels — 5.75% year over year.

Although the levels seem high, prime consumers are continuing to pay their bills. The number of credit card transactions is on the rise even with high interest rates. According to Ted Rossman, Senior Industry Analyst at Bankrate, “The macro picture is fairly bright.”

The customers with good credit are bearing the burden of debt repayment. But credit card providers are not taking their customers for granted, actually tightening spending controls and minimum spending requirements. Some issuers are cutting credit card benefits.

Rising HELOC balances, up $11 billion in the quarter, also show growing homeowner confidence and continued access to credit among prime borrowers.

There was an increase in credit card debt of $24 billion for a total of $1.23 trillion in Q3. The average APR on the credit card account with balances is approximately 22.8%, while the average rate is about 24% for the newly issued credit card debt.

There is one side to the card growth, however, which is good news. The reasons for the bigger balances are likely the result of spending power and confidence, especially among the high-rated card users.

Their payment track record is still good, aside from concerns on the part of the credit card providers about the number of outstanding debts — 4.5% of the total debt — that are already delinquent, according to the Fed.

Despite rising credit card balances, prime borrowers have maintained their payment track record.

Student loan distress remains a background risk — 9.4% of borrowers are now over 90 days past due.

Prime credit profiles are the foundation of the card business. Consumers with higher credit scores are continuing to pay their bills on time and are managing their balances well. Lenders reward card loyalty with benefits such as miles and the ability to redeem points freely. But they’re also looking for the earliest indications of distress.

The big players are heating up the competition for credit card businesses. They are enticing big-spending consumers with rewards credit cards offering benefits such as cash rewards and rewards points for airline travel miles. One area seeing strong growth is the premium credit card.

Some card issuers have already begun to roll back bonuses for new card acquisitions and tighten approval requirements. Others are cutting the growth of credit lines or focusing reward promotions more discriminately.

None of these are panic moves — just risk management practices. But having strong balance sheets is now more important than growth as debt levels increase.

The increase in consumer debt also affects the price of risk-based lending. The cost of funds is higher. The required rate of return on card-backed securities has increased. Even the best customer portfolios will likely face slight increases in APR and stricter internal card limit controls.

Prime borrowers benefit more than their near-prime cohorts from top-tier terms, including longer 0% intro APRs and higher credit limits, as well as richer reward multipliers. This is an edge as the market tightens.

Record household debt shows consumers are still heavy credit users. But prime borrowers continue to manage debt well. Credit-card balances are increasing, but payment rates among strong score borrowers remain high. Issuers are balancing reward programs and risk control to keep portfolios healthy.

The card market is looking good as the new year approaches. But lenders know that vigilance pays even in prime territory. A strong credit profile remains every borrower’s best protection against the next tightening cycle.