U.S. Revolving debt slowly rebounded in June, based on the latest update by the Federal Reserve. The Seasonally Adjusted metric moved to $992.2 billion in total, only $7.8 million shy of passing the $1 trillion mark.
The $1 trillion mark is significant, not for the twelve-zeros, but because the metric seems to level off three and erode. For example, in 2017, the revolving debt metric grew from $960.1 billion to $1.016.8 trillion but dropped below the threshold as COVID disrupted households and the general economy. Similarly, during the Great Recession, the $1.019 trillion May 2008 peak slipped to a low of $836.5 in July 2011.
Assuming modest growth in reported numbers, the July 2021 metric should probably hit a flat $1 trillion, with modest gains experienced between June and July over the past five years.
Why the Revolving Debt Metric is Important
Revenue streams fall into three components for credit cards: fees, interchange, and interest. Fees commonly come into play if the account becomes delinquent; however, fees are down with delinquency at historic lows.
Revolving debt affects fees and interest. Interest imposed on revolving balances is the key revenue generator, and at today’s rates, which average 16.30% for accounts charged interest, every revolving dollar counts. For a quick and dirty estimate, divide 16.30% by 12, which is 1.35833%, and multiply by the current $992.2 in revolving debt to find the interest revenue in the range of $13.5 billion for the month.
The difference between $992.2 billion and $1 trillion is nominal, but the marker is important. With steady population growth and a stable credit scoring system in the United States, the $1 trillion is likely an indicator of where the U.S. revolving credit market will level off.
The Challenges
Top players still drive the card market, but there are plenty of opportunities for middle-market banks, credit unions, and community banks to generate revenue in payment cards. Credit union credit card portfolios only advanced from $60.6 billion to $61 period between May 2021 and June 2021, which suggests a significant opportunity for the segment. While top-tier banks must contend with Wells Fargo reigniting their card business, and the success of Goldman Sachs’ Apple card, the opportunity to emphasize credit union membership is at an all-time high.
For now, take the $1 trillion metric as a win. The broader question will be how long will it stay above that market!
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
