Understanding the Rise in Retail Credit Card Debt and the Impact of Buy Now, Pay Later

In recent years, the financial landscape has seen significant changes, particularly in the realm of consumer credit. One of the most notable trends in 2023 was the increase in retail credit card debt and the growing popularity of buy now, pay later (BNPL) options. This blog delves into these trends, providing insights into how they affect consumers and what they mean for the future of retail financing.

Total Retail Credit Card Debt Increased by 6.7%

Despite a moderation in inflation in 2023, retail credit card balances remained elevated. By the end of the third quarter (Q3) of 2023, the total retail credit card debt had increased by 6.7%, rising from $118.9 billion in 2022 to $126.9 billion. This increase occurred even though the number of retail credit card accounts had decreased from the previous year.

The average retail card balance also saw a significant rise, growing by 7.1% to $1,188 as of Q3 2023. This trend indicates that consumers are carrying higher balances on their retail credit cards, which can lead to increased financial strain, especially with the high-interest rates associated with these cards.

Those With Poor Credit Scores Growing Their Balances the Fastest

Consumers with fair and poor credit scores experienced the most significant increases in their retail card balances. This is partly due to the higher interest rates on these cards, which already have above-average annual percentage rates (APRs). For instance, a $1,600 retail card balance with a 30% APR paid off over a year would cost about $270 in interest charges, regardless of the consumer’s credit score.

Data from Experian shows that those with poor credit scores (300-579) saw their average retail card balance increase by 18.6%, from $1,356 in 2022 to $1,608 in 2023. Consumers with fair credit scores (580-669) also saw a significant increase of 8.5%, from $1,693 to $1,837. These consumers are more likely to use store credit cards than general-purpose credit cards but may not have the option to transfer their debts to lower-cost financing options.

Average Retail Card Balances Rose Nationwide

The increase in retail card balances was observed across all states and Washington, D.C. Texas had the highest average balance, while Hawaii had the lowest. Even in states with moderate balance growth, the annual increase was at least 4%. States with greater economic growth, such as Illinois, Massachusetts, Montana, Oregon, Virginia, and Washington, saw balances increase by more than 10% in 2023.

Younger Generations Add to Their Retail Card Balances, Despite Buy Now, Pay Later

In 2023, younger generations saw the most significant increases in their retail card balances. Generation Z (ages 18-26) experienced a 10% increase, while Millennials (ages 27-42) saw a 9.7% rise. Despite growing more slowly, Generation X (ages 43-58) still carries the largest balance of any generation, with an average balance of $1,528.

This trend is noteworthy given the increasing popularity of buy now, pay later options among younger consumers. Despite the availability of BNPL, many younger consumers continue to rely on retail credit cards, contributing to the overall increase in balances.

More Consumers Consider Buy Now, Pay Later an Option

With rising interest rates on other forms of credit, many consumers are turning to buy now, pay later options as a more convenient and cost-effective form of financing. According to a 2022 study by the Consumer Financial Protection Bureau, the average BNPL loan size was only $135, indicating that these plans are often used for smaller purchases.

The Federal Reserve Bank of Boston reports that BNPL plans are gaining wider traction among consumers. Most consumers (77%) have heard of BNPL plans, and more than half remember being offered it as a payment option in the past month. BNPL plans are particularly popular among consumers earning $75,000 to $100,000 annually, but they are also used by those with lower incomes.

Interestingly, consumers with higher FICO® Scores are also gravitating towards BNPL. While you may not need a credit score to qualify for a BNPL offer, most users already have a credit score. At least 20% of consumers with a FICO® Score of 649 or lower used BNPL plans in the past month, compared to 9.3% overall. This trend suggests that BNPL is becoming a widely accepted financing option across different credit score bands.

Big-Ticket Purchases More Common with Buy Now, Pay Later

While BNPL plans are often associated with smaller, impulsive buys, they are increasingly being used for big-ticket items. Purchases costing more than $1,000 are now frequent, with home furnishings and appliances being the most common categories. Vacation packages and airfares are also popular uses for BNPL plans.

BNPL is particularly popular among consumers who are cash-crunched. Although BNPL users have similar levels of credit card debt as those who don’t use this payment method, they have much lower balances in their checking accounts. This indicates that BNPL plans are used by some consumers as a cash flow management tool, especially those with fluctuating incomes, such as gig economy workers.

Retail Card Spending Is Much More Modest Than Other Credit Card Spending

Despite the increase in retail card balances, the relative size of their total debt and average balances shows that store credit cards play a smaller role in today’s economy. The $127 billion in retail card balances is about one-eighth the size of outstanding credit card debt. Estimates suggest that BNPL plans are even smaller, with consumers collectively carrying about $15 billion in BNPL debt.

However, within this smaller space, BNPL is growing in popularity, particularly among younger consumers. Meanwhile, the increase in retail card balances, driven by higher-than-usual retail credit card APRs, should not be seen as evidence that retail card popularity is on the rise.

At O1ne Mortgage, we understand the complexities of managing credit and debt. If you’re looking for expert advice and tailored mortgage solutions, don’t hesitate to call us at 213-732-3074. Our team is here to help you navigate your financial journey with confidence.