Consumers spend more on cards, but avoid taking on new credit
While consumers may be more open to using their credit cards
than they have been in the recent past, it appears they're still relying
on the cards they've already got in their wallets, rather than applying for new ones, according to data
released Tuesday by the Federal Reserve Bank of New York.
The bank's quarterly report on household debt and
credit, released Nov. 27, showed consumers' credit card balances rose by around $2 billion to approximately $674 billion in the third quarter of 2012 after tumbling to their lowest levels in 10 years
the previous quarter.
The growth in credit card debt didn't translate into
an expansion in new credit, however. The number of open credit card accounts
fell for the second quarter in a row, underscoring the fact that although
consumers are more comfortable with carrying higher levels of card debt,
they're less interested in being able to borrow more than their current credit
limits allow. Credit inquiries
-- which measure how often consumers apply for additional
credit -- also fell for the third consecutive quarter, according to the report.
Despite the weak demand for new credit, overall
consumer credit, excluding mortgages, jumped 2.3 percent in August. The third
quarter's significant growth in consumer debt was driven in part by a spike in
student loan debt. However, auto loans --
which rose to their highest levels in almost four years -- and credit card debt also
played a noteworthy role, said the Fed.
consumers, stronger spending
Experts say that consumers appear to have gained significant control over their
finances after a rocky decade in which the debts they owed was far more than they could pay. Mortgage debt fell considerably in the
third quarter of 2012 to its lowest level in six years, according to the report,
while delinquencies also fell.
"Consumers have really benefited from low interest
rates in the process of deleveraging," says Keith Leggett, a senior economist
at the American Bankers Association. "That is allowing them to better manage
Consumers also appear to be far more optimistic
about their personal finances than they have been in the recent past,
particularly as the job market slowly improves and the housing market continues
to pick up. The number of people applying for new mortgages, for example, rose
significantly in the third quarter, with mortgage originations increasing to $521 billion.
Experts say that the strengthening housing market is
especially good news for economic growth since it means consumers are feeling
more confident about their ability to take on debt and are likely to spend at
least some of their income on new furniture and other household goods.
in mortgage originations, auto loans and credit card balances suggests that consumers
are slowly gaining confidence in their financial position," said Donghoon Lee,
senior economist at the New York Fed in a press release accompanying the report.
"As consumers feel more comfortable, they may start to make purchases that were
Already, consumers have begun replacing worn-out
household items. The third quarter's modest uptick in credit card debt corresponded
with a significant increase in the number of people that bought durable goods,
such as household appliances, over the summer.
After laying low for much of the year, consumers seem to be letting loose a little, says Don Dutkowsky, a professor
of economics in the Maxwell School of Citizenship and Public Affairs at
Syracuse University, and have begun spending on goods they don't necessarily
That's a good sign that they're feeling more
confident, he says. "Durable goods are the kind of goods you can do without,"
Often, during a recession, consumers put off
replacing big ticket items, such as a worn-out washing machine, until they feel
more confident about spending. So "one of the signs of recovery here is, OK,
their households are in more efficient shape and maybe the job market has slowly
gotten better and so they released the throttle a little bit," says Dutkowsky,
and replaced those aging items. That said, Dutkowsky says consumers overall are still being very cautious. Consumer spending on durables is up, but it's still very low by
The ABA's Keith Leggett also cautions that gas prices were significantly higher toward the end of the third quarter, squeezing consumers' ability to pay for things in cash. "Therefore, people may have incurred credit card bills because it was costing more to fill up the tank
of gas," he says.
quarter, the Federal Reserve analyzes approximately 40 million consumer credit reports
and looks at how people are using credit during that time.
Some of the highlights of this quarter's report include:
Demand for credit in the third quarter of
2012 was notably weak. The number of consumers who applied for additional
credit in the past six months fell for the third quarter in a row. Credit inquiries fell to 167 million in the third quarter of 2012, down from 168 million in
the previous quarter.
Growth in new credit was also
lackluster. The number of open credit card accounts fell by 1 million customers
in the third quarter of 2012, while existing credit card limits remained flat.
Consumers appear to be getting a better grip on their finances. Bankruptcies dropped by 16.3 percent in the third
quarter, while overall delinquencies remained relatively flat.
Consumers are charging more to their
cards. Credit card balances increased by about $2 billion in the third quarter,
after dropping by $7 billion in the spring.
Experts say that recent trends in consumer spending
have been a positive sign for the economic recovery. However, many consumers
still aren't done shedding the debt they've got and so growth will remain
relatively slow for some time.
"I think we probably have another year or two to go"
before consumers are done paying down their heavy debt loads, says the ABA's
Leggett. "We didn't get there overnight with regard to building up household debt.
It's going to take time for households to right-size their balance sheets."
Consumers are also facing a substantial drop in
their disposable income at the beginning of the year if lawmakers don't come to
an agreement about how to stop the automatic series of spending cuts and tax
hikes that are scheduled for Jan. 1. That, in turn, could cause consumer
spending to reverse significantly, say experts, and prompt consumers to
Even the debates going on now about the fiscal cliff
could have a substantial impact on consumer confidence, experts say. "One of the
things we remember from July and August 2011 was when this whole debate about
raising the debt ceiling dominated the airwaves, it really caused consumer
confidence to crash," says Leggett. It's possible that if lawmakers continue to be unable to work together, that may significantly erode consumers' optimism, he says.
See related: Reversing course again, consumer card balances fall
Published: November 27, 2012
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