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Bad Credit Credit Cards – Consumers Have Payed Credit Cards Again! From Most Ever. But Cash-Out Refis has risen to its highest level since the 2005/6 peaks. What gives?

They are not the same consumers.

By Wolf Richter for WOLF STREET.

There is no such thing as a monolithic American consumer. Everyone does their own thing. And the folks with credit card debt and other revolving loans like personal loans – all high-yield debt – repaid it in record sums in January, possibly with their stimulus money for it.

And in the opposite direction, homeowners have been extracting cash from their homes by cash-out refinancing their mortgages in a fourth-quarter clip that hasn’t been seen since the high point of the good old days before the 2005 and 2006 housing crunch was seen, and at record-low mortgage rates as long as they lasted. But these two groups may not be the same people.

Paying off credit cards and other revolving loans. In January, consumers paid off their credit card balances by 3.6% compared to December and 11.9% year-on-year to $ 940 billion, according to the Federal Reserve on Friday afternoon. It was the largest year-on-year decline in credit card data history, dating back to the 1970s, and was inflated by the year-on-year declines during the financial crisis:

There have only been two periods in credit card history when credit dropped year-on-year for two very different reasons: first, during the financial crisis when consumers stopped using their credit cards; and second, during the pandemic, when the government sent hundreds of billions of dollars in waves of stimulus payments to consumers, and some of that money was used to pay off credit card debt.

January is the hangover month after holiday binge spending and borrowing, and credit card balances (not seasonally adjusted) tend to decline from December onwards as people begin to grapple with the aftermath of their eating frenzy. Between 2013 and 2020, the decline in credit card balances averaged 2.4% from December to January. In January of this year, credit card balances fell 3.6% from their lowest level in December since 2016.

In dollar terms, credit card balances fell by $ 35 billion, non-seasonally adjusted (red line), to $ 940 billion in January, after falling by $ 153 billion from their December 2019 peak; and seasonally adjusted (green line), they fell $ 10 billion to $ 965 billion in January, after falling by $ 128 billion from the December 2019 high.

The cumulative two-year slump during the financial crisis was greater than the decline in the first 10 months of the pandemic. In Congress, however, the next stimulus packages are being put together, which are likely to lead to further slumps in the future:

In the opposite direction: cash-out refis.

Historically low mortgages in the fourth quarter sparked a historic mortgage refi boom that surpassed the highs before the housing crisis. Amid this historic refi boom, there was an almost historic cash-out refi boom. The amount homeowners extracted from their homes in the fourth quarter rose to $ 63 billion, with borrowers extracting an average of $ 27,000 from their homes, according to a report by the New York Fed two weeks ago (chart via New York Fed) :

Homeowners used the proceeds from the cash-out refis to finance consumption and “investment opportunities, including home improvement,” as the New York Fed announced.

So, on the one hand, consumers are paying off their expensive credit cards and other revolving loans; and on the other hand, consumers borrow a lot more money for their homes.

It is possible that some people with cash out refis also have credit card debt and use the proceeds from the cash out refis to pay off their credit card debt, using historically cheap mortgage debt to pay off expensive revolving debt, and that would make a lot of sense.

But it’s also possible that there is little overlap between these two groups – between those who have paid for their credit cards and those who have increased their mortgage debt through cash-out refis.

In other words, it is possible that people with credit card debt paid it off with their stimulus checks but may not own a home or be unable to pay out a refi because their credit rating is too low or because they do not have enough equity in their home or because their mortgage is in default and / or default – over 17% of FHA mortgages are in default, including those that were in default prior to the forbearance.

So the theory that most cash-out refis were used to pay off expensive credit card debt does not hold up. These are different consumers. As the New York Fed noted, the cash-out refis were mainly used to finance consumer spending or do-it-yourself, such as a new deck and hot tub reordered due to the surge in demand, or speculative investment in what? were apparently forever booming financial markets.

Suddenly rising mortgage rates tango with refi boom.

Mortgage rates bottomed out in early January and have risen since then. The average 30-year fixed-rate mortgage rate rose from 2.65% in early January to an average of 3.02% in the week through Wednesday, according to the Freddy Mac Benchmark Index. Since then, mortgage rates have continued to rise, which is not yet reflected in the data:

Mortgage rates are still extremely low by historical standards, but a little higher than they were two months ago – and now there has been a lot of talk about it in the financial markets and people are telling the Fed to do something to lower those mortgage rates, which is not at all is done.

But the more mortgage rates rise, the harder it becomes to get refis payouts up and running. So while some consumers create a little extra space on their credit card for future consumption, other consumers will find that withdrawal refis to finance consumption are more expensive and difficult to implement.

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