During the first quarter of 2024, American consumers reduced the amount of credit card debt they owe. That’s been a rare occurrence in recent years. So that’s good news, right?
Well, maybe. Given the number of Americans struggling with credit card debt, seeing the balances owed actually go down might seem like a cause for celebration. However, other debt trends from the first quarter suggest people might just be trading one problem for another. There’s still some work to be done before consumers break out of the cycle of continually taking on debt.
Credit card debt shrunk in the first quarter of 2024
According to the quarterly Household Debt and Credit Report from the Federal Reserve Bank of New York, total credit card balances shrunk during the first quarter of 2024.
At the end of last year, Americans owed a total of $1.129 trillion in credit card debt. During the first quarter of 2024, that amount declined to $1.115 trillion. So, during the quarter credit card debt shrunk by $14 billion.
This decline in credit card debt is noteworthy because it hasn’t happened much lately. Based on the New York Fed’s quarterly figures, credit card debt has only shrunk one other time in the past three years.
It’s too early to say whether this is the beginning of a trend. After all, while credit card debt shrunk by 1.24% in the first quarter, it still grew by 13.08% over the past year.
Also, the first quarter of the year is the time when Americans have historically tended to pay down credit card debt. Part of the problem is that they typically take on more credit card debt during the rest of the year.
So, the reduction of credit card debt during the first quarter could be a step in the right direction. However, it will need to be continued for Americans to make a significant dent in their debt.
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Consumers still took on more debt during the quarter
One sign that people have more work to do before they get their borrowing under control is that total consumer debt still rose during the first quarter of 2024.
While credit card debt declined by $14 billion, total consumer debt rose by $184 trillion during the first quarter. So, even as people were paying down their credit card balances, they were taking on other types of debt.
Some of this could represent refinancing activity – using other borrowing to pay down credit card debt. Much of it was probably a form of substitution – using other sources of debt besides credit cards to pay for new purchases.
Mortgage, auto loan and home equity line of credit (HELOC) debt all increased during the first quarter. HELOC debt grew at the fastest rate, with a 4.44% increase during the quarter.
This represents a change in borrowing behavior. In recent years, credit card debt has been the fastest-growing type of debt. HELOCs have had the slowest growth rate, other than student loan debt. Favoring HELOCs over credit card borrowing could represent good news or bad news.
The good and bad news about HELOCs
Like credit cards, HELOCs are a form of revolving credit. That means they aren’t a one-time loan. Instead, they represent a line of credit that’s available for you to tap into when you need it, and then pay back so you can use it again in the future.
The good thing about consumers choosing HELOCs over credit cards is that HELOCs typically carry much lower interest rates. The bad part is that HELOCs put the borrower’s home on the line.
HELOCs are a form of mortgage, which means they are secured by equity in the borrower’s home. That security explains why HELOCs offer lower rates since most credit card debt is unsecured.
The risk is that if you fail to make your HELOC payments, the lender could foreclose on your home. If consumers are starting to use HELOCs as a substitute for credit card borrowing, credit card default rates are a cautionary tale.
The rate at which credit card balances are becoming seriously overdue has increased for eight straight quarters. It now stands at the highest level in over a dozen years. If borrowers were to follow this pattern of missed payments with the HELOC debt they’re now taking on, growing numbers of them would face losing their homes.
Credit card refinancing options
As mentioned earlier, one explanation for the recent popularity of HELOCs is that they can be used to refinance credit card debt at a lower interest rate. However, anyone looking to refinance credit card debt should also be aware of three other options:
- A home equity loan. Like a HELOC, these can offer relatively low rates because they are secured by your home. That means they pose the same risk if you don’t make your payments. However, a home equity loan might be a better option than a HELOC for reducing your debt over time. That’s because they have a defined schedule for repayment, instead of giving you a line of credit you can tap into repeatedly.
- A personal loan. Personal loans typically have much lower interest rates than credit cards, so they can reduce the cost of your debt. Those rates aren’t as low as home equity rates, but personal loans don’t use your home as security.
- A balance-transfer credit card. These let you borrow without putting up any security, and offer a super-low interest rate – often 0% – for an introductory period. However, that low interest rate period is limited, so the key to using these successfully is to have a plan for paying off the debt within the introductory period.
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With any of these options, the main benefit of a lower interest rate is that it should allow you to pay off your debt faster. Lower rates mean more of your payments can go toward paying down your balance rather than to interest.
A rule of thumb any time you borrow should be to go into it with a plan for how you’re going to pay off the debt. Create a budget that will allow you to make your payments and reduce your debt over time. Whether it’s to refinance or pay for new purchases, a repayment plan will allow you to use different forms of credit without continually trading one debt – and one form of risk – for another.
