Credit card activity rebounded sharply in May, following a pullback in April, according to new figures released by federal banking regulators. Financial observers say the surge in credit card use may be another sign that consumers are increasingly relying on plastic to cover their expenses.
The Federal Reserve's latest G.19 report shows revolving credit (of which about 98 percent is comprised of credit card debt) surged at an annual rate of 7 percent in May. That marked a reversal from April, when revolving credit declined by half a percentage point. April revolving credit was initially estimated to have increased by half a percent. With the latest increase, revolving credit advanced to $961.8 billion from $956.2 billion the month before.
Credit card use rebounded in May
(Click on graph image to enlarge.)
Source: Federal Reserve G.19 report on consumer credit for May 2008
Overall consumer credit (revolving and nonrevolving) rose 3.6 percent in May to $2.57 trillion, on the heels of an identical increase the prior month. Overall consumer credit was previously estimated to have risen 4.2 percent in April.
In the current economic climate, consumers may be turning to plastic as a last resort, according to Jeff Langer, a partner in the banking department at Chapman and Cutler LLP, a law firm in Chicago. The Fed report shows "consumers increasing their use of credit cards as lenders have frozen or reduced many lower-rate home equity lines of credit (HELOCs) and gas and food prices have continued to rise," Langer says. That comes against a simultaneous backdrop of "growing job losses and the rising unemployment rate, which has strained household budgets and necessitated the increased use of credit -- and credit cards."
"You've got a lot of lousy dynamics going on here," agrees Dennis Moroney, research director with TowerGroup, a research and advisory services firm. "What's affecting people more and more is the cost of energy."
Another factor may also be at work. Banks have increased minimum credit card payments over recent years, meaning borrowers must come up with added cash each month. This may not have been a problem when people were paying their monthly balances in full, but now that they are forced to revolve, it is. "When people start to pay the minimum amount, it will be higher," Moroney says. "If they don't meet the minimum payment, they go delinquent."
Consumers temporarily relying on credit cards to get themselves through a rough patch would be one thing, but data shows that when it comes time to repaying their debt, cardholders are also having difficulty covering their credit card bills. Recent reports from the top banking trade group the American Bankers Association and credit rating agency Fitch Ratings have shown economic woes producing elevated levels of credit card delinquencies.
All this added stress may mean consumers abandon the idea of making all their credit card payments, instead focusing on just one of their cards, Moroney says. He says stimulus checks have gone to helping consumers tread water or toward savings in case a member of their household should be unemployed.
"I expect delinquencies are going to continue to rise," Moroney says. If consumers are to get a handle on their debt, "something's got to give somewhere," he says.
Rate survey: Credit card rates hold steady for 2nd week – The average interest rate on a new credit card offer remained unchanged this week, according to the CreditCards.com Weekly Credit Card Rate Report, though issuers are still tweaking APRs ...
Consumer credit card balances keep rising, Fed says – Consumer credit card balances moved higher in December, as more Americans pulled out their cards for the holidays. But experts say that a return to holiday shopping may not be the only reason why consumers saw their balances swell ...
Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!
