Consumers Increasing Credit Card Balances Instead of Opening New Cards

Average credit-card balances reached a record high in the third quarter, according to a report from TransUnion. Despite a decrease in new credit card accounts being opened, consumers are utilizing their existing accounts more, resulting in an 11% increase in average balances compared to the previous year.

Unsecured personal loans also saw a significant increase, with the average balance per consumer rising close to 9% over the past year. This trend was observed across all risk levels, from low credit scores to higher credit scores.

In addition to credit cards and personal loans, other forms of debt also showed notable growth. Aggregate credit-card balances rose by 15%, reaching a total of $995 billion in the third quarter. Mortgage balances increased by 3.2% to $11.8 trillion, while auto-loan balances saw a 5.2% rise to $1.6 trillion. Unsecured personal loans experienced a surge of 14.8% compared to the previous year, reaching a total of $241 billion.

Despite these increases in balances, there was a slight decline in the number of newly opened credit accounts compared to the previous year. The decline was most notable in mortgage originations, which decreased by 37% to 1.2 million in the second quarter of 2023. Additionally, there were 3.8% fewer newly opened credit-card accounts, 8.7% fewer new auto loans, and 14.5% fewer unsecured personal loans compared to the previous year.

Overall, consumers are displaying a preference for increasing their existing credit-card balances rather than applying for new credit cards. This shift in behavior has led to higher average balances while simultaneously impacting the number of new credit accounts being opened.

Consumer Demand for Credit Remains Strong

Consumers' appetite for credit continues to grow, driven by the need for liquidity in their everyday purchases, according to industry experts. This trend is also attributed to lenders tightening their standards, favoring individuals with excellent credit scores.

TransUnion, a leading credit bureau, notes that there has been a notable shift in the distribution of new borrowers towards those with super-prime credit scores above 781. Major banks like Wells Fargo have acknowledged this shift and are raising their lending standards for consumers with lower credit scores.

While recent reports indicate robust consumer spending, economists caution that this momentum may not be sustainable. Household budgets face mounting pressures due to declining real income growth, high inflation, and interest rates. Many individuals find themselves relying heavily on their savings to sustain their spending habits.

However, high-income individuals with excellent credit scores continue to utilize their credit cards to pay for services like travel. Despite potential financial obstacles, there appears to be pent-up demand among this demographic. These individuals typically pay off their credit card balances in full each month, shielding themselves from worrying about higher interest rates. It's worth noting that inflation may also compel them to allocate more of their income towards rent and other necessities, prompting some to make more frugal choices when it comes to store-bought items.