June was an optimistic time for many Americans. As lockdowns, mask mandates, and travel restrictions began to disappear, the threat of the COVID-19 pandemic appeared to be receding, and people became excited for a recovery summer.
With the end of the pandemic seemingly in sight, it’s not surprising that Americans began spending, and many turned to borrowing to do it.
What may be surprising, though, was just how much people started to borrow. In the month of June, data from the Federal Reserve showed that there was a sharp increase in consumer borrowing — in fact, a 10.6% annual increase in total consumer credit. This is the largest annual increase since the 10.88% annual increase that occurred in the summer of 2011.
This reflects a sharp turnaround from the decline in borrowing that occurred during the heart of the pandemic in 2020. And it’s a very strong sign that consumers were feeling optimistic about the future and were ready to spend money, even if that meant charging their trips or purchases on their credit cards.
One email a day could help you save thousands
Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time.
Please read our Privacy Statement and Terms & Conditions.
Americans turn to credit cards to fund summer spending
Although Americans borrowed more money in general across multiple loan types in June, the biggest increase in consumer credit that occurred over the course of the month was driven by a rise in revolving debt. That refers to credit cards and similar types of credit where consumers can borrow up to their credit limit, then borrow more as they repay the existing debt.
Revolving credit use increased by 22% annually in June, which is the largest annual increase since 1998. Non-revolving credit, which refers to things like auto loans that are paid back in fixed installments, saw just a 7.2% annual increase in June. Non-revolving credit use tends to be less volatile than revolving credit.
The increased reliance on credit to finance purchases in June follows a trend that began in May of 2021, when consumer credit use increased by 10.4%. This is a sharp turnaround from 2020 when there was an overall decline in consumer credit based on the year prior. That was largely driven by reduced use of revolving debt as people stayed home during the pandemic and spent less on their credit cards.
Now may not be the best time to take on more debt
While it’s good news that Americans felt confident enough to spend more during the early summer months, increased borrowing isn’t necessarily a desirable outcome.
Credit card interest rates remain high, and those who borrow to fund their purchases could find themselves with less financial flexibility going forward as they commit to ongoing monthly payments. If the Delta variant progresses or a worse variant comes along in the future, it could lead to increased economic upheaval, which could have a negative impact on incomes. If that were to happen, consumers may end up regretting their higher credit card bills.
While there’s nothing wrong with using credit cards to earn rewards and take advantage of the benefits they provide, it’s best to try to pay your balance in full each month. The economy may not be as strong as you hope going into the fall season. You’ll want to be prepared if things take a turn for the worse.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/consumer-credit-use-in-june-sees-biggest-increase-in-a-decade/