Fed report shows sharp drop in credit card use

By Jeremy M. Simon

See updated story: Credit card use drops sharply again in December 

Consumers sharply reduced their credit card balances in December, according to monthly data from the Federal Reserve, as borrowers made fewer purchases with plastic.

That decline in credit card balances stems from a general pullback in consumer spending, analysts say. "Over the past three months, nominal consumer spending has been falling at the fastest rate since World War II," says Sean Maher, an associate economist with Moody's Economy.com in West Chester, Pa. Maher says that falling gasoline prices have meant less reliance on credit cards at the pump. Based on Moody's Economy.com estimates, drivers could save well above $100 billion over the course of 2009 if gas remains at $2 a gallon.

Today's release of the Fed's monthly G.19 report on consumer credit highlighted that drop in card use. According to the G.19 report, revolving credit -- a category of loans made up almost entirely of credit card debt -- showed a 7.8 percent decline in December. Previously, the Fed had reported that revolving credit plunged in November 2008 at an annualized rate of 3.4 percent. However, that number was revised sharply lower in the current report to 8.5 percent. Overall, revolving debt fell to $963.5 billion from a total of $969.9 billion in November.

Meanwhile, nonrevolving credit fell 0.2 percent in December. That section of the report includes a variety of types of lending, primarily auto loans, student loans and loans for mobile homes, boats and trailers.

Taken as a whole, consumer credit (revolving and nonrevolving) fell 3.1 percent to $2.562 trillion, a decrease from $2.569 trillion in the prior reading. It marked the fourth decline in the last five months. 

Analysts say that poor consumer spending, including a lackluster holiday season, mean card balances were held in check. "We didn't really see a big jump in the spending numbers in December. I don't think the holiday season is going to be able to single-handedly reverse the trend of falling consumer revolving balances," Maher says. Others experts agree. "Not spending is a symptom. The disease is unemployment," says Tony Plath, professor of finance at the University of North Carolina at Charlotte.

Meanwhile, the latest Federal Reserve quarterly survey of senior loan officers shows that lenders have become stricter when it comes to extending credit.  

Although consumers are almost certainly scaling back their use of credit cards, it is more difficult to predict whether they are paying down balances or simply revolving them from month to month. For the time being, balances appear to be largely holding steady. "The people who are working aren't adding to their balances and are paying down the balances that they have," Plath says.

See related: Federal Reserve survey shows lenders continue to tighten credit standards

Published: February 6, 2009

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