Interest Rates Tap Out Consumers as Credit Growth Slows in January: Fed Report

Several major U.S. credit cards are seen in New York City on May 20, 2009. Spencer Platt/Getty Images

Consumer credit extended its expansion streak to kick off the year as revolving and nonrevolving debt grew, new Federal Reserve data confirm.

U.S. consumer credit increased by $14.8 billion in January, up from an $11.56 billion gain in December. That fell short of the market estimate of $20 billion and represented the second-lowest print since the central bank started raising interest rates.

Overall, consumer credit advanced at a seasonally adjusted annual rate of 3.7 percent, up from an upwardly revised 2.9 percent in the previous month, according to the Fed’s G.19 Report. That included an 11.1 percent year-over-year surge in revolving credit—mostly credit cards and lines of credit—and an annualized jump of 1.2 percent in nonrevolving credit, such as mortgages, automobile loans, and student loans.

Total outstanding consumer credit was $4.8 trillion in January, up from $4.78 trillion in December.

The latest numbers come soon after the Federal Reserve Bank of New York’s Center for Microeconomic Data stated that credit card balances advanced $61 billion in the fourth quarter to $986 billion, topping the pre-pandemic high of $927 billion.

Delinquency rates are beginning to creep higher, according to the New York Fed’s “Quarterly Report on Household Debt and Credit.” The flow into serious delinquency (90 days or more delinquent) exceeded 4 percent to cap off 2022, up from 3.2 percent at the same time in the previous year.

“Although the overall share of debt that is delinquent remains below pre-pandemic levels, the relatively high transition rates into delinquency suggest a rapid return to pre-pandemic delinquency rates for credit card and auto loan borrowers,” New York Fed economists wrote.

A man shows off some of his credit cards as he pays for items at Lorenzo's Italian Market in Miami on May 20, 2009. Joe Raedle/Getty Images

Despite the smaller-than-expected number in the Fed’s consumer credit report, financial experts warn that two forming scenarios present a mixed picture of the broader economic landscape.

The first is that Americans are slamming into a wall of mounting debt and rising interest rates—the average credit card interest rate is 23.55 percent. The second issue is that the slowdown in credit growth may suggest that shoppers are purchasing fewer big-ticket items amid inflationary concerns, which might affect an economy that is driven by consumption.

A January LendingClub Corporation survey revealed that 64 percent were living paycheck-to-paycheck in December. Additionally, the report found that an estimated 9.3 million more consumers are living paycheck-to-paycheck.

“The effects of inflation are eating into every American’s wallet and as the Fed’s efforts to curb inflation drive up the cost of debt, we are seeing near-record numbers of Americans living paycheck to paycheck,” Anuj Nayar, financial health officer at LendingClub, in a statement. “While the number of Americans living paycheck to paycheck is close to the height we saw in the middle of the pandemic, the causes appear to be very different, as the economy is not sheltering in place like it was back in 2020.”

At the same time, recent PYMNTS and LendingClub research found that consumers are tightening their belts so far this year.

The study, titled “New Reality Check: The Paycheck-to-Paycheck Report,” found that the share of consumers anticipating their financial situation to deteriorate in 2023 has diminished. This was driven by many consumers’ tackling credit card debt, employing better budget strategies, and reducing spending. However, this might also come at the expense of saving, as 27 percent of respondents withdrew money from their savings to manage credit card debt.

This is supported by a recent Bankrate poll that discovered that 39 percent of individuals surveyed in January had smaller emergency savings than a year ago. Plus, 10 percent still didn’t have any cash set aside for a rainy day.

“It’s clear that the less-than-optimal economy, including historically high inflation coupled with rising interest rates, has taken a double-edged toll on Americans,” Mark Hamrick, Bankrate’s senior economic analyst, said in the report. “Many have resorted to tapping their emergency savings if they have it, or have taken on credit card debt, or some combination.”

That said, according to the Bureau of Economic Analysis, the personal savings rate was 4.7 percent in January, up from 4.5 percent in December. While that’s the lowest level since 2008, it has trended higher in recent months.

So, how do consumers feel about their finances?

The latest WalletHub Economic Index, released in February, found that consumers are 5 percent less confident about their financial outlook from last year, driven by growing money-related stress levels, lower financial optimism, real estate valuation declines, and fewer new employment opportunities. But credit score security remains strong.