Consumers slash card balances to lowest levels in 10 years
It's been three years since the Great Recession
formally ended in June 2009, but one effect lingers: Consumers are still furiously paying down their credit card balances, according to data released Wednesday by the Federal Reserve Bank of New
York, and, this time, they are paying them off on time.
The bank's quarterly report on household debt and
credit, released Aug. 29, showed that consumer credit card balances fell to
their lowest levels in 10 years in the second quarter of 2012, while overall consumer
credit tumbled by $53 billion. Late payments on credit cards also fell
significantly, reaching their lowest levels since 2008.
Experts say that years of sluggish growth have taken
a toll on consumers' willingness to take chances with higher interest loans. Although they may be willing to take on some debt when household items break down, consumers won't overextend themselves until they see stronger signs
that the economy is actually improving at a healthy rate, say experts.
"As the economy continues to languish again and
unemployment remains stubbornly above 8 percent, I think consumers continue to
remain wary and cautious," says James Butkiewicz, a professor of economics at
the University of Delaware.
In each of the past three years, consumers have watched economic
growth start out relatively strong early in the year and then peter out by
spring, dashing hopes for a robust recovery. "We just can't seem to
ignite a fire that really gets going. It always seems to die out," says
The economic starts and stops have made it hard for consumers to
trust that their own household balance sheets are secure. Consumers remain worried about their job security and their ability to pay bills, says Don Dutkowsky, a professor of economics
in the Maxwell School of Citizenship and Public Affairs at Syracuse University.
The recovery's frailty also discourages consumers, he says. "When you're growing at a relatively slow pace, any
of these headwinds -- such as increased gas prices or the tsunami in Japan -- will
just knock it down again. It's not a robust recovery in any
sense." And that's bad news for consumer spending. "Consumers have to see a
robust economy for them to really be confident enough to take on more debt."
Other debt still rising
Consumers aren't holding on too tightly to their
wallets, though, when it comes to college tuition, cars and
homeownership. The New York Fed's latest report, drawn from a massive national sampling of consumer credit reports, found that student loan debt increased substantially for the second quarter in
a row, hitting $914 billion by the end of July 2012. Auto loans also increased
by $13 billion in the second quarter of 2012, hitting $750 billion. Meanwhile,
the amount of debt related to new mortgages rose to $463 billion.
Economists say that the substantial differences in
growth between nonrevolving loans, such as student and auto loans, and revolving loans, which are mostly made up of credit cards, underscores the fact that
consumers will borrow when they must. However, they aren't going to overspend.
"I think consumers and households have made real
attempts to pay off credit card debt for the obvious reason that credit card
interest rates are so high," says Dutkowsky. Consumers will take out the
loans they need to in order to buy a new car or to buy a durable good that's
broken down, such as a washing machine. "But they're trying not to go
overboard," he says.
quarter, the Federal Reserve Bank of New York analyzes approximately 40 million
consumer credit reports and looks at how people are using credit.
Some of the highlights of this quarter's report
The number of credit account inquiries
(credit checks by banks) decreased for the second quarter in a row, slipping 2
percent since April. The drop in demand corresponds with other Federal Reserve
data, which found that consumers aren't as eager this year for new cards as they
were the previous year.
Aggregate consumer debt fell by $53
billion, while consumer credit card debt fell by $7 billion. The total amount
of debt that consumers are carrying on their cards is now at its lowest level
The number of open credit card accounts fell
slightly as well, to 383 million, after staying put the previous quarter.
Credit card limits also remained largely
flat in the second quarter, falling by less than a percentage point.
Once more, a significantly larger number
of consumers paid their bills on time, with credit card delinquencies falling
by 10.9 percent in the second quarter of 2012. Credit card delinquencies are
now at their lowest levels in nearly four years, according to Federal Reserve
Researchers at the Federal Reserve say that the
second quarter's substantial drop in delinquencies was especially poignant as it shows consumers are getting a better handle on their finances. "The
continuing decrease in delinquency rates suggests that consumers are managing
their debts better," said Wilbert van Der Klaauw, vice president and economist
at the New York Federal Reserve in a statement accompanying the report. "As
they continue to pay down debt and take advantage of low interest rates,
Americans are moving forward with rebalancing their household finances."
I think consumers and households have made real
attempts to pay off credit card debt for the obvious reason that credit card
interest rates are so high.
|-- Don Dutkowsky
Maxwell School of Citizenship and Public Affairs,
That said, delinquencies increased by 8.9 percent on
student loans and by 4.9 percent on home equity lines of credit, underscoring the
fact there are still many consumers in the U.S. who are struggling to pay
banks nor consumers are courting each other heavily
may not be flooding banks with new applications for credit cards, but
banks aren't going after consumers as aggressively either, according to
For example, banks have substantially cut back on
mailing credit card offers to consumers, according to new research from Mintel,
reducing the number of offers they send by nearly half since the summer of 2011.
They have also left the terms of their offers alone for much of 2012, according
to CreditCards.com's weekly survey of card rates. And they have continued to keep a tight rein on
the amount of credit they're willing to dole out amid a tough economy, according
to previous Federal Reserve research.
Experts say that banks are still hungry for new
customers -- but are focusing more on higher-end consumers. They are also cautious about the amount they are willing to spend
courting new consumers and are unwilling to take on substantial risks.
"I think the banks are still feeling a lot of
regulatory scrutiny," says the University of Delaware's Butkiewicz. As a
result, they are being cautious about the amount of credit they are willing to
lend and are concentrating primarily on prime consumers that they know can pay
their bills, he says. "Because of the crisis and because of the increased scrutiny,
everyone is being cautious," adds Butkiewicz. "They don't want to take the
risks they took before."
See related: Reversing course again, consumer credit card balances fall in June
Published: August 29, 2012
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