Recession forecasters tend to jump on any financial datapoint they can find to justify their predictions of imminent financial doom and one of the those that bothers me the most is definitely our “record level of credit card debt.”

Here is a chart from a CNN article over the summer titled Americans’ credit card debt hits a record $1 trillion:

Before we get too concerned, consider the following:

1) Credit card “debt” is measured by simply combining all of the balances of every active card in the U.S. at any given time. So, if you use a credit card for everyday spending in order to get rewards and delay the cash outlay for the stuff you buy, that is considered “debt” even if you pay the balance in full every month and never owe a dime of interest. Considering how many people do this every month, and what percentage of overall credit card spend would come from such consumers, it is highly misleading to characterize every dollar of credit card balance each month as “debt.”

2) The financial media usually highlights the total amount of this so-called debt because it’s a big number. $1 trillion!!! Far more helpful would be per-capita data since the country’s population grows each year. If you don’t make that adjustment, most years will be a new record high.

3) As many financial professionals out there know, debt is one thing (sorry, for this one I am going to pretend the entire $1 trillion+ is debt) but what really tells the story of overall financial health is both assets and liabilities, income and expenses. Having debt is not a big deal (sometimes even quite beneficial) if your assets and income can easily support it.

With those ideas in mind, let me reframe the chart shown above to put credit card “debt” in better context:

a) Although total credit card balances have grown by 56% from 2013-2023, the U.S. population has grown by 24 million people during that time. Thus, on a per-capita basis, credit card balances average $3,029 per person in 2023, up only ~45% since 2013 ($2,089 per person).

b) As previously mentioned, the $3,029 figure does not represent true debt like a student loan or auto loan balance would. I don’t have data to indicate what fraction of card balances are carried over month-to-month, but it is safe to assume it is materially lower than $3,029.

c) How do we know if credit card spending has really been growing at problematic rates? Easy, let’s look at income data. According to the U.S. Department of Housing and Urban Development, median family income nationally has grown from $64,400 in 2013 to $96,200 in 2023 - an increase of 49%.

To summarize, $1 trillion in total U.S. credit card balances might appear to be concerning in the absence of any other information. If we adjust the data for population growth and compare it to income growth, we see that over the last decade incomes have risen 49% while credit card balances have risen 45%. Additionally, as credit card rewards programs have become more engaging over the last decade, it has become more common for consumers to use cards as a way to benefit financially by using them for most purchases and paying their balances off each month.

And so, there doesn’t appear to be a credit card debt problem at all.

That is not to say we will avoid a recession in 2024 (nobody knows that) - but rather simply that credit cards will not be a contributing factor if we don’t.

An interesting article in the Wall Street Journal published yesterday asks “Your Credit Card Has A Spending Limit. Should Your Marriage? (paywall).” This is a fairly common question and one I have discussed numerous times with clients even though it fits more into personal finance generally than investing specifically. The author offers the suggestion that partners have an agreed upon spending limit under which any purchase need not be signed off on by the other person. For example, as long as you want to buy something for less than $500, just go ahead and both partners agree to never question it.

This solution seems like a simple way to avoid arguments about excessive spending by one particular partner in a relationship, but it has an obvious drawback that the article fails to mention; usually one partner engages in the bulk of the problematic (real or perceived) spending. A simple per-item spending cap would likely work well when both partners spend roughly equally on discretionary purchases, but the bulk of the arguments about money will occur when spending patterns diverge. If one of you buys 10 $500 items per year and the other only buys 2 such items, you might not actually avoid having an argument about excessive spending.

Is there a better solution? Every relationship is different, but I think there is a near-perfect alternative. What if each partner gets their own monthly stipend that they can spend however they want with no questions asked? As long as each person is given the same amount each month, and the total allowance fits within the family’s overall budget (and thus does not impact your long-term financial goals), this set-up can work extremely well.

My wife and I combine our finances, except for this key item. All of our income goes into a shared account but we also each have our own bank accounts that are solely funded equally by automatic monthly deposits from the shared account. No spending limits, no questions asked. And our differing spending patterns (I tend to buy fewer, more expensive items, whereas my wife is the opposite) never come into play because we are each treated equally in such an arrangement.

I call this a near-perfect solution when I recommend it to others because I can think of at least two possible criticisms. One, if each partner automatically gets their “allowance” sent over to their account each month, you can pretty much assume it will all be spent eventually, which means total spending over time might be higher than it otherwise would (this is the same argument for zero-based budgeting in the corporate world). While true, as long as the monthly amount fits nicely into your budget and doesn’t impact other goals, I think it’s okay to spend a reasonable amount on yourself.

The other potential issue comes into play if each of you has a personal credit card that is used for these purchases. In that case, one partner could actually spend more than their allowance by racking up a credit card balance and just make partial monthly payments from their own bank account. If this system is to work, you need to have enough discipline to not rack up debt individually. If both partners aren’t okay with that, then simply scrap the credit cards and rely on debit alone for personal spending.

All in all, I think this idea works great for most couples, especially when compared to alternatives such as the spending limit concept from the WSJ article, which seems to have a glaring flaw.