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Consumer credit card balances fall, mark 2 full years of decline

Average household has lost about $2,800 in card debt

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Consumer credit card debt has now fallen for two full years, according to the Federal Reserve's latest G.19 consumer credit report, as continuing economic troubles have made banks and borrowers unwilling to carry too much debt.

AFTER STEEP CLIMB,
CREDIT CARD DEBT FALLS


Americans' credit card debt has fallen for a record 24 straight months. During that time, consumers have shed more than $150 billion in credit card debt. That sounds huge, but it isn't when compared to the nation's total credit card debt. The graph above shows the dramatic rise of credit card debt between 1970 and 2008 and then the sharp drop since 2008.

With today's consumer credit release, there isn't much reason to believe that things will change anytime soon: Fed data shows card balances fell 7.2 percent in August, continuing the drop that began in September 2008 and marking 24 consecutive months of decline. The last time credit card balances rose, George W. Bush was president, few non-Alaskans had heard of Sarah Palin, Michael Jackson was still alive and the iPad was just a glimmer in Steve Jobs' eye. 

Economic pressures on lenders and cardholders alike have taken a serious bite out of credit card balances. Revolving debt levels dropped to $822.2 billion from $827.2 billion in July, marking a plunge of $151.4 billion from their August 2008 peak of $973.6 billion. For the typical credit cardholder, the result is substantially lower balances. The average U.S. household with credit card debt -- of which there are roughly 54 million, according to government data -- has eliminated roughly $2,804 in credit card debt as consumers increased their repayments or had the debt charged off as uncollectable.

It wasn't just card balances that fell in August. Overall consumer debt fell by 1.7 percent to $2.41 trillion. That number includes both revolving credit -- almost entirely made up of credit card debt -- and nonrevolving debt -- which includes auto loans, student loans and loans for mobile homes, boats and trailers.

Economists say some card issuers remain hesitant to lend and continue to charge off uncollectable debt, which takes those seriously delinquent accounts off the banks' books. When banks erase those unpaid balances, they in turn get removed from the Fed's G.19 data. 

Cardholders are also playing a role. "Consumer confidence remains low and households are still focusing on repaying debt and saving," says Sean Maher, associate economist with Moody's Analytics. 

Monthly statement changes motivate repayment
Consumers may also be paying down debt in response to changes on their monthly account statements. A newly released survey conducted by Consumer Reports in July showed 23 percent of respondents "said they were motivated to pay off their credit cards faster by the Minimum Payment Warning on their bills mandated by the Credit CARD Act of 2009," Consumer Reports said in a press release. "The warning shows cardholders how long it would take to retire their debt and the total amount of interest they must pay if they made only the minimum payment each month." (To see how long it would take to repay your debts making only the minimum monthly payment, try CreditCards.com's minimum payment calculator.)  

Cardholders' increased repayment efforts mean banks are receiving more bills on time. Data from the American Bankers Association shows that bank card delinquencies -- defined by the ABA as payments 30 days or more overdue -- fell in the second quarter of 2010, reaching their lowest level since 2001.

The ABA's chief economist, James Chessen, said lower delinquency levels are due to bank write-offs, as well as cardholders' increasingly cautious approach. "Consumers continue to focus on reducing debt levels, using credit cards less and building savings," Chessen said in an ABA press release.

How much further will card balances fall?
Credit card balances will continue to fall over the short term, experts say, but the decline should conclude next year. "We expect that revolving credit will decline further over the next several months, but we expect the rate of decline to gradually taper off. Revolving credit is expected to begin inching higher again in the first half of 2011," says economist Maher. 

As Maher explains, the Fed's survey of senior loan officers indicated that some banks are finally starting to ease their lending standards for credit card applications. Meanwhile, he says that late-stage credit card delinquency rates are falling, while default rates should also begin to rapidly decline, reducing write-offs' impact on credit balances. "Finally, consumer spending will accelerate at a steadier pace once the labor market gains momentum," Maher says.  

See related: Credit card reform law and you, Calculate the cost of just paying the minimum, Credit card lending standards loosen for 1st time in 3 years, Credit card rates: interactive graphic on APR changes

Published: October 7, 2010


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