Why Are Americans Cutting Back on Credit Card Debt?

Americans cut back dramatically on their credit card debt in March, and it may be because banks are getting pickier about whom they extend credit to. 

Two reports this week illustrate the trend. On Tuesday, data on borrowing from the Federal Reserve showed that revolving debt (mainly credit card debt) held by U.S. consumers grew by just $152 million in March, the smallest growth since 2021 and just a tiny fraction of the $10.7 billion of February. A separate report Monday showed that banks cut back on credit card lending in the first quarter, and economists think the two may be linked. 

Tighter Credit Standards, High Interest Rates Causing Downshift

Recently, banks have made it harder to get all kinds of credit, including credit cards.

Loan officers have gotten increasingly worried about the direction of the economy and that borrowers won’t be able to pay loans back amid high interest rates and a slowing job market. They’ve lowered the credit limits offered and raised the credit scores required to get a new card, and generally made it harder to qualify to borrow—in economics jargon, they’ve “tightened” credit.

Higher interest rates may also be playing a role. The Federal Reserve’s campaign of anti-inflation interest rate hikes has driven the average interest rate for a credit card up to 21.59% as of February, its highest since the Fed began keeping track of rates in 1994, making credit card balances weigh heavier on household budgets.

“Growth in the stock of consumer credit is firmly on a downward trend as higher interest rates and tighter lending standards crimp borrowing,” Shandor Whitcher, an economist at Moody’s Analytics, wrote in a commentary. “These factors are expected to hold growth to roughly this pace into 2025.”

Sustained Drop in Consumer Credit Could Hit Economy

While the month-to-month data on consumer credit can be prone to swinging up and down, a sustained borrowing slowdown could have broader implications, dragging down consumer spending, the main engine of the U.S. economy. 

Indeed, the credit crunch has already taken a toll on the economy, according to research from the Federal Reserve Bank of San Francisco this week by research advisor Vasco Cúrdia. Tightened lending standards because of high interest rates, economic worries, and the aftereffects of the March 2023 collapse of Silicon Valley Bank slowed the economy. Tightening has such an impact that the unemployment rate was 3.7% at the end of 2023, where it would have been 3.3% if not for the credit tightening, his analysis found. 

Lower credit card lending could further slow economic growth, and potentially lower inflation along with that could prompt Federal Reserve officials to pull the trigger on long-awaited cuts to the central bank’s benchmark interest rate.

“Less borrowing should mean slower spending, prying open the door for rate cuts this year,” Sal Guatieri, senior economist at BMO Capital Markets, said in a commentary.