Americans borrowed a lot more money in May, according to new data from the Federal Reserve’s Consumer Credit Report released in July. There was a 10% increase in credit use on a seasonally adjusted annual basis in May 2021. This is the biggest increase since 2016, when consumer credit saw a seasonally adjusted annual increase of 6.9%.
Use of revolving credit such as credit cards is a leading driver of this borrowing, although people are taking out more auto loans as well.
Here’s what this means for individuals and the economy as a whole.
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Is increased borrowing good or bad?
In May 2021, the total outstanding balance of consumer credit hit $4.25 trillion. This is higher than the $4.19 trillion in outstanding debt in April 2021, and reflects a sharp increase from $4.186 trillion in the fourth quarter of 2020. This excludes mortgage loans, which make up the largest debt category.
This sharp increase in consumer debt is a major change compared to last year, when consumer credit use declined for the first time since the 2009 recession. While credit use has steadily climbed in 2021, the 10% rise in credit use in May is nearly double the prior increases the Federal Reserve reported.
In some ways, it could be a good sign that people are borrowing more. More debt sometimes suggests that consumers are more optimistic about their financial futures and more confident in the security of their jobs. And as people spend money, it stimulates economic growth that’s good for everyone.
However, it can also be a problem if people turn to credit cards because they can’t afford the basics without them, or if they have to take out very large car loans.
Unfortunately, inflation has begun to affect people’s pocketbooks. The prices of goods and services have risen dramatically this year. That’s due to pent-up demand from COVID-19, pandemic-related supply chain issues, and government stimulus money increasing currency supply and driving up demand.
Some people may be charging more on their credit cards because of how this inflation affects their budgets. And the price of used cars has skyrocketed this year, driving an increase in auto loan borrowing.
Ultimately, individual borrowers should be aware of the risks of increased revolving debt — even if they are optimistic about the economy improving.
Ideally, people shouldn’t borrow more than they can afford to pay back when the credit card bill comes due, avoiding high credit card interest rates. And it’s typically good to keep auto loan balances as low as possible — and to stick to loans with short payoff times — to avoid committing to large monthly payments that could affect other financial goals. With the Federal Reserve data clearly showing a borrowing upswing, it’s worth remembering these basic borrowing ideals to help you stay on firm financial footing.