A Trillion Dollars in Credit Card Debt Could Be Good for US

June 12, 2014         By: Jane Genova

An indicator of a strengthening US economy could be consumer credit card debt, and signs point to it skyrocketing to a trillion dollars.

According to the US Federal Reserve, credit card debt currently stands at $854.2 billion. The average consumer has $15,191 in debt.  Compared to the average student loan debt of $33,607, that is relatively low.

But, as the recovery gains traction, that 15 thousand and change in debt could increase significantly.  And that could be great for the U.S. economy.There are two major reasons why. One is associated with the consumer and the other relates to the small business owner.


The Consumer

America’s economy is consumer-driven. About 70 percent of it, says the Federal Reserve, is tied to consumer spending. The encouraging news on that front is that, according to the Conference Board, in May the Consumer Confidence Index bounced up to 83.0.  That’s the highest it has been since December 2007.

A boost in credit card debt does not necessarily mean that the card holders are taking it on the chin in double-digit interest rates.

The savvy among credit card users are adept at playing the zero or very low interest game. They continue to transfer balances to cards which charge no or very low interest for a certain period of time.

When the time is up, for a relatively modest fee such as two to five percent of the balance, they do another transfer. In a sense they have access to free money.

The funds that they gain by not using to pay off the card can be “invested” in holding onto their house until they find a job, putting a down payment on a house or rental property, improving their property, buying into a hedge fund, enrolling in a program to learn coding, or be used to pay off high-interest student loans. All these initiatives could augment economic growth.

However, there’s a negative to revolving debt. Zero and low interest balance transfers are usually provided in good times as a promotional tactic to attract new customers or encourage current customers to boost their balances. Hard times could return and credit card issuers may put the brakes on such offers.  That leaves households on the hook for big balances which eventually incur high interest rates.


Small Business Owners

Increased credit card debt could indicate that more small businesses are expanding. There are more startups and distressed companies dodging the bankruptcy bullet. All this is good news for the economy.  According to the US Small Business Administration (SBA), small businesses create about 64 percent of new jobs and maintain over half of existing private sector jobs.

Currently, traditional financial institutions remain tight about lending to small businesses, even those which are solidly in the black.

They have always been wary of startups. Often, bridge loans are difficult to acquire. These are all factors why small businesses have found credit cards, including personal ones, ideal for expansion or buying time in hopes of a turnaround.

The SBA Office of Advocacy found that about 14.5 percent of small businesses turned to credit cards, personal and business, for expansion financing.  Three-fifths of them reported that they were satisfied with the credit cards terms and conditions.  Most of them applied to large credit card issuers.

Most startups are funded by credit cards. It’s cool to boast about getting venture capital, having angel investors or generating tons of money through crowdfunding. But the reality is that the lion’s share of entrepreneurs have to provide the seed money themselves. Those self-funders include Larry Page of Google.

For small businesses in trouble, the problem is often time-related. They, for example, have to wait until spring to sell the hot new fashions. Meanwhile, the owners have to pay fixed costs. Temporary financing from alternative lenders can incur triple-digit interest rates. Much less expensive is simply to leverage personal and business credit cards to keep afloat. A successful selling season could wipe out all that debt.

In the next several years, a trillion-dollar credit card debt figure be something economists will crow about. It may be one of the most solid symbols of higher GDP growth.