The Federal Reserve Bank of New York Center for Microeconomic Data issued its Quarterly Report on Household Debt and Credit, showing that total household debt climbed $286 billion (1.9%) in the third quarter of 2021 to $15.24 trillion. The total debt balance is now $1.1 trillion higher than the end of 2019 and $890 billion higher than the third quarter of 2020.
The largest component of household debt are mortgage balances, which rose by $230 billion and stood at $10.67 trillion at the end of September. Meanwhile, credit card balances increased $17 billion — the same size increase as the previous quarter. Despite the increase, however, credit card balances remain $123 billion lower than they had been at the end of 2019.
According to researchers, this apparent rise in consumer spending and credit card balances reflects a shift from COVID-19 economic behavior when most people scaled back spending and substantially paid down debt.
The new extension of installment credit remained near series high for mortgages, according to The Fed. report. Mortgage originations, including refinances, stood at $1.1 trillion for the third quarter of 2021, falling slightly from this year’s second quarter at $1.2 trillion. Aggregate limits on credit card accounts now stand at $3.96 trillion, increasing by $88 billion through the third quarter, effectively erasing the decline seen in the first three quarters of the pandemic recession.
“As pandemic relief efforts wind down, we are beginning to see the reversal of some of the credit card balance trends seen during the pandemic,” said Donghoon Lee, research officer at the New York Fed. “Namely reduced consumption and the paying down of balances. At the same time, as pandemic restrictions are lifted and consumption normalizes, credit card usage and balances are resuming their pre-pandemic trends, although from lower levels.”
Typically, credit cards follow a seasonal pattern in which balances show a modest increase in the second and third quarters followed by a substantial increase in the fourth quarter due to Holiday spending. Yet, consumers usually pay off these balances in the first quarter of the new year.
During the pandemic, however, consumer behavior was atypical. Households that were supported by direct cash payments and forbearance programs to pause mortgage payments allowed many to largely reduce their credit card debt. Federal researchers said with the forbearance programs starting to wind down, consumers can use some of their available credit to make ends meet.
The report also noted that aggregate delinquency rates across all debt products declined and have remained quite low since the beginning of the pandemic. This can be attributed to a large degree to the CARES Act support and lender concession. The transition from mortgages to delinquency increased slightly to 0.41% from the second quarter record low as forbearance options are no longer widely available.
Lenders may be offering more credit to borrowers with lower credit scores after clamping down at the start of the pandemic. The report shows that credit card issuance is returning back to pre-pandemic levels for borrowers with low credit scores. Median credit scores for mortgages and auto loans declined slightly in the third quarter, but still remain high by historical standards, researchers said.
