Credit Card Trends Hint at Deflation

U.S. consumers are turning away from credit cards. Is it a shift in attitude?

The Federal Reserve released a survey this week showing that applications for consumer credit cards has collapsed during 2020. In October, the proportion of U.S. households applying for any form of credit over the past year was at 35%. That compares with 46% in February. Applications for new credit cards was at 16%, down from 26% in February, and the lowest level since data started being collected in 2013.

The dramatic decline in new applications for credit coincides with a drop in credit card balances this year. A drop in balances is consistent with the fall in economic activity during 2020 but the decline in new credit card applications might be hinting at a fresh attitude emerging in consumer behavior.

When social mood starts to trend negatively, people reevaluate their lifestyles. This year has undoubtedly been associated with people questioning how they live their lives and what changes could be made. The decline in new credit card applications could be a sign that people are becoming reluctant to extend their finances, perhaps due to uncertainty over their employment or because their new lifestyle involves a general slowing down in activity. It’s a retrenchment which would be consistent with a negative mood trend.

The necessary condition for debt deflation is an existence of excess credit. In 1945, U.S. consumer credit stood at $5 billion. It took 50 years for it to surpass $1 trillion in 1995. But it then took less than 25 years to balloon to over $4 trillion. In our book, that constitutes an excess credit situation, especially as most of it is non-self-liquidating.

This latest data is a sign that the air might be starting to go out of the debt bubble.

US New Credit Card Applications DEC 2020