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Consumer credit card use suffers biggest drop in 31 years

Economic woes, job fears prompt people to rein in spending

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Credit card balances suffered their biggest percentage drop in more than 30 years in February, according to the latest Federal Reserve data, as consumers responded to the recession by reducing their reliance on plastic.

Consumer credit card balances
plummet in February
Federal Reserve's January 2009 G.19 report

Those slumping card balances were outlined in today's release of the Fed's monthly G.19 report on consumer credit. The report showed revolving credit -- a category of loans made up almost entirely of credit card debt -- dropped by 9.7 percent in February, the largest decline since a 15.7 percent plunge in January 1978. Overall, revolving debt fell to $955.7 billion from a total of $963.5 billion in January. Meanwhile, nonrevolving credit increased 0.2 percent in January to $1.608 trillion. That section of the consumer credit report includes a variety of types of lending, primarily auto loans, student loans and loans for mobile homes, boats and trailers.

In all, consumers shouldered $2.564 trillion in total debt in February. That marks a decrease from a revised January figure of $2.571 trillion. In the previous report, January consumer debt was estimated at $2.564 trillion.

When it comes to declining balances, analysts say cardholders are largely the culprit. "This is not coming all from the credit card companies. Consumers are cutting back," says Susan Menke, senior financial services analyst with Mintel International in Chicago, explaining that an industrywide tightening of credit can't alone account for February's sizable decline in card balances.

"I think it's just a general mood -- people are cutting back," Menke says. "If they don't do it, credit card companies are going to do it for them."

Other experts agreed that changing consumer attitudes were a key reason for the drop. "I think people are fearful," says Dennis Moroney, research director at advisory services firm TowerGroup in San Antonio. "Fear is motivating people to behave cautiously. You don't see them in the shopping center buying big screen TVs or eating out at restaurants."

Instead, the unstable economy is encouraging people to put money aside. "People are saving out of fear of being able to pay their mortgage if they lose their jobs," Moroney says. Menke sees a combination of factors driving down balances. "People are spending less, saving more and the credit card companies are cutting limits. It's a triple whammy," she says. Menke explains that even cardholders who have yet to experience lowered limits are fearful they might be and are choosing to pay off card balances and keep their plastic holstered in their wallets.

For the time being, cardholders are able to pay down debt. "People who are still working are massively paying down credit cards in anticipation of getting laid off," says Tony Plath, professor of finance at the University of North Carolina at Charlotte.

Federal Reserve G.19 report on consumer credit spending in February 2009

"Right now, the dominant trend is people paying down balances in anticipation of a rough year ahead. Later that trend will reverse" as people are forced to put basic expenses on credit cards, Plath says. Although the latest jobs report showed unemployment reached 8.5 percent in March -- a 25-year high -- some experts say credit cardholders have yet to feel the full impact of the troubled labor market. "The real financial stress of increasing unemployment will take another few months to really show up in credit card balances," says Plath. "Since the unemployment number just spiked in the last two months, people won't start charging necessities until they run out of cash a few months into the unemployment cycle," he says.

Moroney says much of that expected future growth in card balances could be due to an inability to make payments. "Past recessions have shown growth in credit balances, and I expect that to continue," he says. "Unfortunately, I think if that happens, it won't be retail sales driving the increase but delinquent balances growing." He also expects an increase in charge-offs --  which occur when lenders conclude they are unable to collect a debt and therefore remove it from their financial accounts.

Menke issues a different prediction for what the consumer credit data will show in regards to revolving credit. Despite some bouncing up and down from month to month, we are "generally on a trend where numbers will level off or even decline over the next six months to a year," she says. "Society as a whole is deleveraging."

See related: Cardholders beware: Terms, they are a-changing

Published: April 7, 2009


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