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Consumer credit card balances fall for 16th straight month

But consumers' overall debt increases for 1st time since early 2009

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Americans increased their overall consumer debt in January for the first time in a year, even as they continued to trim their credit card balances.

HOW MUCH CREDIT CARD DEBT
HAVE AMERICANS SHED?

Americans' credit card debt has fallen by more than $111 billion from its September 2008 total of $975.7 billion -- including a modest drop of about $2 billion in January.

The chart below shows how steadily consumers have pecked away at that debt -- or had it charged off -- during a record run of 16 straight monthly declines in credit card balances. That's an average of $2,061 eliminated per household with credit card debt.

Note: Decrease is cumulative, and shown in billions.

According to the Fed's monthly G.19 consumer credit report released Friday, consumer debt rose 2.4 percent to $2.46 trillion in January, ending a record run of 11 straight monthly declines, dating back to January 2009. However, consumer credit card balances fell 2.3 percent in January. U.S. consumers erased nearly $2 billion in debt, marking a record 16th straight month of decline.

The report considers various types of consumer debt, including revolving credit -- a loan category comprised almost entirely of credit card debt -- as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers.

The revolving debt component fell to $864.4 billion from $866.1 billion in December. U.S. credit card debt stood at $975.7 billion in September 2008. The 16 monthly declines since then have seen a $111.3 billion plunge in credit card debt. That means the average U.S. household with credit card debt -- of which there are roughly 54 million, according to government data -- has eliminated roughly $2,061 in credit card debt during that period, either by paying it down or having it charged off as uncollectable.

"The momentum of the last 15 months or so has not been shaken," says David Kennett, an economics professor at Vassar College in Poughkeepsie, N.Y. "As long as the labor market remains weak, I expect consumers to retrench and pay down as much debt as they can." 

Unemployment remains a challenge
Based on the latest jobs data, those consumer debt levels will continue to fall. The U.S. Labor Department reported that 36,000 jobs were shed in February as the unemployment rate held steady at 9.7 percent, following the 26,000 jobs that were lost in January.

CONSUMER CREDIT CARD DEBT SHEDDING SLOWS

In January, Americans' credit card debt fell by about 2 percent, the smallest decline in recent months. 

Below, the line on the left shows the percentage change in credit card debt from the fourth quarter of 2008 through the end of 2009. The line on the right indicates the percentage change in credit card debt over the last three months.

Although many experts agree that cardholders have shunned credit, some analysts say banks are largely responsible for the decline in card balances. "While there is evidence that consumers are using credit less and relying more on prepaid and debit cards as fallout from the recession, the biggest part of the runoff in credit card receivables was caused by issuers chasing customers away by closing inactive accounts and being too aggressive," Robert Hammer, chief executive of credit card consulting firm R.K. Hammer, tells the industry publication PaymentsSource.

Recent data from the Fed highlighted that combination of debt-shy consumers and aggressively stingy banks. According to the Beige Book survey of the Fed's 12 regional banks, loan demand into February remained weak across the country, with most regions also indicating that banks stayed cautious about lending. The Beige Book is issued eight times a year, two weeks before the Fed's Federal Open Market Committee meets to determine monetary policy. 

Law raises awareness, tarnishes plastic
Meanwhile, experts say that anti-debt attitudes have been reinforced by the Credit CARD Act of 2009, which restricts some of the most unfair and deceptive lending practices. "The publicity around the new legislation to protect consumers has also drawn attention to what a bad way credit cards are to borrow money," Kennett says.

Among the CARD Act's provisions that took effect on Feb. 22 is a requirement that bank statements warn consumers that making only the minimum monthly payment results in a longer payoff period, which raises the overall cost of repaying the debt. That knowledge may help discourage borrowing, experts say. "The mere fact that it can take (literally) decades to pay off debt at minimum payment rate and the specter of the mountain of interest incurred should encourage credit card balance reduction," Kennett says via e-mail. 

The debt will rise again
Nevertheless, consumers who have tried plastic can't keep the debt monkey off their backs forever.

Experts say cardholders will begin to rebuild their balances later this year. "Unfortunately, I do not expect this trend to last forever," Kennett says. "As confidence in the future direction of the economy returns, and unemployment falls, I expect our national debt addiction to manifest itself again." 

See related: Calculate the cost of just paying the minimum, Calculator: How long until my card balance is paid off?, A guide to the Credit CARD Act of 2009, Lending standards show signs of easing

Published: March 5, 2010


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