Americans borrowed significantly more money in May, according to new data from the Federal Reserve’s consumer credit report released in July. There was a 10% increase in the use of credit on a seasonally adjusted annual basis in May 2021. This is the largest increase since 2016, when consumer credit experienced a seasonally adjusted annual increase of 6 , 9%.
One of the main drivers of this borrowing is the use of revolving credits such as credit cards, although people are also taking on more car loans.
Here’s what that means for individuals and the economy as a whole.
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Is the increase in borrowing good or bad?
In May 2021, total consumer credit outstanding reached $ 4.25 trillion. This figure is higher than the $ 4.19 trillion of outstanding debt in April 2021 and reflects a large increase from the $ 4.186 trillion in the fourth quarter of 2020. This excludes mortgages, which constitute the category of largest debt.
This sharp increase in consumer debt is a major change from last year, when the use of consumer credit declined for the first time since the 2009 recession. steadily increased in 2021, the 10% increase in credit utilization in May is almost double the previous increases reported by the Federal Reserve.
In some ways, this could be a good sign that people are borrowing more. Increased debt sometimes suggests that consumers are more optimistic about their financial future and more confident in their job security. And as people spend money, it spurs economic growth that is good for everyone.
However, it can also be a problem if people turn to credit cards because they can’t afford the essentials without them, or if they have to take out very large car loans.
Unfortunately, inflation has started to hit people’s wallets. The prices of goods and services have increased significantly this year. This is due to pent-up demand for COVID-19, supply chain issues linked to the pandemic, and government stimulus funds increasing the supply of foreign currency and increasing demand.
Some people may charge more on their credit cards because of how this inflation affects their budgets. And the price of used cars has skyrocketed this year, leading to an increase in auto loans.
Ultimately, individual borrowers should be aware of the risks of increasing revolving debt, even if they are optimistic that the economy is improving.
Ideally, people should not borrow more than they can afford to pay off when the credit card bill is due, thus avoiding the high interest rates on credit cards. And it’s generally good to keep auto loan balances as low as possible – and stick to loans with short repayment terms – to avoid committing to large monthly payments that could affect other goals. financial. With Federal Reserve data clearly showing a recovery in borrowing, it’s worth remembering these basic borrowing ideals to help keep you on a solid financial footing.