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Job fears keep credit card balances falling

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Credit card balances fell again in March, based on the latest data from the Federal Reserve, as cardholders opted to save their money rather than spend on plastic.

Consumer credit card balances
keep dropping in March
Federal Reserve's March 2009 G.19 report

The Fed's monthly G.19 report on consumer credit, released Thursday, showed just how much those card balances declined. According to the report, revolving credit -- a loan category comprised almost entirely of credit card debt -- fell by 6.8 percent in March, a narrower drop than the record 12.1 percent slump in February. (February's number was revised down sharply Thursday from 9.8 percent, already the biggest percentage plunge in more than 30 years.) Overall, revolving debt fell to $945.9 billion from a total of $955.7 billion in February. For the first quarter, revolving credit fell at an annual rate of 6.5 percent.

Meanwhile, nonrevolving credit fell 4.2 percent in March to $1.605 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 totalled $2.551 trillion in March, compared with $2.564 trillion in February.

Cardholders remain cautious, despite signs of economic recovery
"Consumers are continuing to deleverage, even though we are beginning to see many green shoots -- signs that the economy is beginning to turn a corner," says Robert Dye, senior economist with PNC Financial Services.

One indication of that deleveraging -- or shedding of debt -- is a personal savings rate that rose to 4.2 percent in March from 4 percent in February. That consumer savings cushion has been "lessening the need for them to borrow via credit cards," says Sean Maher, associate economist with Moody's Economy.com in West Chester, Pa. For Dye, the savings rate represents a "good news/bad news story." "A consumer base that is saving money is a more resilient base," Dye says. Still, the fact that consumers are putting money in the bank has negative consequences for the economy in the short term. For the time being, a rising saving rate "takes a bite out of consumer spending, which is a necessary driver for economic growth." he says.  

Retailers are feeling the pinch. On Thursday, Walgreen's estimated that credit card payments are down 10 percent to 12 percent so far in 2009 compared with the same period last year, as consumers are now making their purchases with cash.

The growing unemployment rate is prompting consumers to save more. "Nothing scares people like their neighbor losing their job, except for their spouse losing their job. When you're nervous, you don't spend," says David Wyss, Standard & Poor's chief economist. Nevertheless, Wyss also sees evidence of "green shoots." He adds that "the pop in consumer confidence suggests they're not quite as worried about that as they were."  The consumer confidence index firmed somewhat in March, before surging higher in April.

Nothing scares people like their neighbor losing their job, except for their spouse losing their job. When you're nervous, you don't spend.

-- David Wyss    
Standard & Poor's chief economist    

Analysts -- and Fed chief Ben Bernanke -- expect the job market's rebound to lag a broader economic recovery. In testimony earlier this week, Bernanke noted that "businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes." That could continue to impact the use of credit cards for some time. "It's likely that we will see an extended period of unemployment that will last through 2010," PNC's Dye says. That could prompt some cardholders to use plastic more frequently as their incomes thin out or vanish altogether. "I can see the potential for some households to be forced into a situation of relying more on credit," Dye says.

However, Dye says that while paychecks account for the majority of consumer income, they aren't the only source of household earnings. As an example, he highlights such income streams as rental incomes, Social Security payments and tax returns. "Wage income is actually a smaller portion of income than most people realize," Dye says.  

Banks ease up on access to credit
Meanwhile, fearful of struggling consumers who may be unable to make payments, banks have been extremely stingy about extending credit. There are, however, signs that strict approach may be starting to change, analysts say. "Banks are getting a little less nervous about extending credit," says Wyss.  That doesn't mean lenders are handing out credit cards to anyone with a pulse. "Two years ago, you'd walk into a bank, and they'd hand you all the cash you wanted," Wyss says, but that's not so anymore.

Taking a look at the latest Fed quarterly survey of senior loan officers, first-quarter data suggest that the tightening of lending standards is "not increasing as sharply as it did through 2008, but not loosening either," Maher says. The banking industry confirms this fact. In a press release Thursday, the American Bankers Association acknowledged that consumers are relying less on credit, saving more and paying down debt. "Just as customers are being cautious, banks too must be certain that they are making good loans, and bank regulators expect this of banks," ABA chief economist James Chessen said in the release.  

"Some of the decline in consumer credit is due to tightening standards," Dye says. But with slightly fewer banks now apparently tightening their standards, "that's another sign that we are starting to turn the corner on this economic and financial crisis," he says.

Nevertheless, consumers will find that becoming a cardholder remains a privilege rather than a right. "It will take banks a while to forget the lesson of the last two years and begin handing out credit cards like candy," says Wyss.

See related: Lending standards keep tightening, Fed says

Published: May 7, 2009


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