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Consumer credit card balances plummet

June drop marks 9th straight month of decline

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Credit card balances dropped sharply in June, according to the latest data from the Federal Reserve, as both consumers and banks remained cautious about shouldering excessive debt.

June drop in credit card balances
is sharper than expected
Federal Reserve's June 2009 G.19 report

The Fed's monthly G.19 report on consumer credit, released Friday, indicated that revolving credit -- a loan category comprised almost entirely of credit card debt -- declined at an annualized rate of 6.8 percent in June, coming on the heels of a 6.3 percent decrease in May. Overall, revolving debt fell to $917 billion from a total of $922.3 billion in May.

As for credit cards, "those balances have definitely come down," says Anuj Shahani, director of competitive tracking services for Synovate's financial services group. 

The nine consecutive monthly declines in revolving credit from October 2008 to June 2009 represent the longest pullback since the report began in January 1968, according to the Fed.

Meanwhile, nonrevolving credit fell 3.8 percent in June to $1.586 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.

Taken as a whole, consumer debt totaled $2.503 trillion in June, down a little more than $10 billion from May. The drop was more than double the $4.7 billion decline that economists surveyed by Thomson Reuters had predicted.

When it comes to debt levels, "there has been a major shift in people's attitudes," says Susan Menke, senior financial services analyst with Mintel International in Chicago. Despite some upward blips in revolving card balances during the recession, "the long term trend is down," Menke says.

Synovate's data confirms the drop in card balances. Shahani says the mean credit card balance for U.S. households fell to $7,489 in the second quarter of 2009. That's down from $7,788 in the first quarter and $7,807 the year before. Shahani says that around 80 percent of U.S. households have credit cards.

The highest mean balance recorded by Synovate was $8,202 in the fourth quarter of 2008, a time when "credit was easy, people were spending a lot," Shahani says.  

Spending vs. saving
Nevertheless, consumers charge on. The Commerce Department reported that consumer spending rose 0.4 percent in June, apparently due to higher prices. When adjusted for inflation, spending declined 0.1 percent. Meanwhile, the personal savings rate fell to 4.6 percent in June from 6.2 percent in May. The May reading was the highest savings level since February 1995.

Consumers may not be buying big screen TVs, but when it comes to everyday expenses like gas and groceries, "we really haven't seen a cutback," Shahani says. 

But that uptick in charges is being offset by a broader consumer desire to pay off debt and banks' desire to reduce their risk levels by offering less credit. 

"The proportion of debt outstanding that is being paid off by consumers is far more than the increase in the new charges," says Shahani. He adds that banks are also playing a role, with "issuers cutting credit lines and thus giving consumer less room to go out and spend on their credit cards." Menke agrees, citing anecdotal evidence. "About 15 to 20 percent of the drop in consumer credit is probably due to issuers closing and lowering credit lines," she says.

A CreditCards.com poll in July 2009 reported that two of every five credit cardholders report being whacked by their card issuers in the past 12 months. Forty-two percent said their issuers had taken some negative action against them by cutting credit limits, increasing interest rates, switching them to variable rate cards or offering an incentive to close the account. 

Cardholders are responsible for the rest of the decline in revolving balances. "The largest proportion of that drop is coming from consumers paying down debt and not using their cards," Menke says.

Recent sharp drop in card offer mailings
finally slows down

The amount of credit card offers sent through the mail to consumers has been plunging for the last couple of years. However, in recent months, the plunge has appeared to level off. Federal Reserve's June 2009 G.19 report

Other research suggests a similar conclusion. Mercator Advisory Group's July 2009 study, "Consumers and their Credit Cards: A Cooling relationship threatens post-recession outlook," notes consumers are in many cases abandoning credit cards for debit, prepaid, charge cards or cash. "Some of this behavior change is voluntary, and some is forced by household economic distress or the risk management decisions of card issuers," the study explains. "But the longer it persists, the more likely it is to stick, and in many cases consumers are saying they expect their changes to be permanent."

Shifting credit card offers
Meanwhile, both Mintel and Synovate say that after a period of substantial cutbacks, banks are reconsidering the credit card offers mailed to U.S. households. After significant declines from 2007 through early 2009, data from Mintel Comperemedia shows the fall in card offers has remained little changed from the first to second quarters of this year. "This is a nice, pretty picture of how the acquisition mail has leveled off," Menke says. Synovate released its own numbers earlier this week that also showed the freefall in the volume of credit card mail offers has stopped.

Analysts say that the credit card offers being mailed now are disproportionately targeting so-called prime borrowers -- consumers with the highest credit scores. Data show a larger percentage of offers for rewards credit cards. "That tells you right there they are targeting more prime borrowers," says Menke, adding that reward offers typically appeal to this consumer segment. Shahani says that 80 percent of the card offers mailed in the second quarter targeted consumers with FICO scores of 700 and above, compared with 60 percent of offers targeting those borrowers in the same period a year prior.

"All issuers are going for the sweet spot -- and that's the prime cardholder," Shahani says.

However, it is these prime borrowers that are most actively scaling back their card usage, Shahani says. He adds that as offer flood their mailboxes, these borrowers -- which make up a tiny proportion of consumers overall -- are less likely to apply for plastic.  

The real increase in revolving credit will come once banks have instituted new business models in response to pending legislation. 

As banks begin mailing offers to more consumers with average credit scores, balances are like to rise. "They have been waiting, starved for credit for a nice year now," Shahani says.

Consumer spending necessary for economic growth
When consumers eventually have greater access to credit and the economy stabilizes, analysts predict that cardholders' changed behavior will continue to be on display.

"People are going to spend out of their immediate salary," rather than thinking of a credit card as an extension of their salary, Menke says.   

That return to responsible spending could act as an important driver for the recovery.  "If we're going to come out of this, we've got to have some support from the consumer," Menke says. 

See related: Credit card mail offers flat as some issuers return to the market, Poll: Two of every five credit cardholders report being whacked by their card issuers

Published: August 7, 2009


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