Credit card balances fall sharply again

Fed data show credit card debt falls a record 12th month

By Jeremy M. Simon

Consumers have spent the past year living frugally, new Federal Reserve data show -- and analysts say an anti-debt mindset isn't likely to change anytime soon.

AMERICANS' YEAR OF LIVING FRUGALLY
Americans' credit card debt has fallen $86.2 billion from its September 2008 total of $975.2 billion. The chart below shows how steadily consumers have pecked away at that debt during a record run of 12 straight monthly declines in credit card balances. That's an average of $946 per credit cardholding household.

The combined fears of borrowers and banks sent credit card balances lower for the 12th consecutive month in September. According to the latest Federal Reserve data released Friday, credit card balances tumbled by $9.9 billion in September. The data, contained in the Fed's monthly G.19 report, looks at various components 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 report showed that revolving credit plunged at an annualized rate of 13.3 percent in September, following an identical drop in August. The September monthly drop is the 12th in a row, dating back to October 2008 -- the longest drop on record. Overall, revolving debt fell to $889 billion from a total of $898.9 billion in August

Americans' credit card debt stood at $975.2 billion in September 2008. The 12 monthly declines since then have seen Americans eliminate $86.2 billion in credit card debt. That means the average U.S. household with at least one credit card -- of which there are 91.1 million, says payment-card industry newsletter the Nilson Report -- has shed roughly $946 in credit card debt during that time.

Nonrevolving consumer credit dropped 3.7 percent in September to $1.567 trillion. Taken as a whole, consumer debt fell nearly $15 billion to $2.456 trillion in September -- the eighth straight monthly drop, dating back to February. It's the first time overall consumer debt has fallen eight months in a row since the Fed begin tracking it in 1943. The last time overall consumer credit fell for seven straight months was in 1991.

Analysts attribute the latest drop in credit card debt to a lingering emotion: fear. "People are getting more cautious about borrowing, and banks are getting more cautious about lending," says David Wyss, the chief economist with Standard & Poor's in New York.

Unemployment tops 10 percent
You don't have to be a psychologist to understand why consumers are afraid to use their plastic. Things began to go really sour economically just over one year ago. In September 2008, Lehman Brothers failed, Merrill Lynch & Co. agreed to be sold to Bank of America, and the Federal Reserve took over Fannie Mae, Freddie Mac and insurance firm AIG. The stock market wasn't spared the economy's woes, falling precipitously.

And while the stock market has rebounded, uncertainty remains. The jobs report released Friday showed that unemployment reached 10.2 percent in October, the highest level in more than 26 years. "The consumer is operating on fear, that's why they're saving," says Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm based in New York. 

The consumer focus on reducing debt has been highlighted in other Fed reports. The second-quarter flow of funds report showed that household debt contracted for the fourth-straight quarter, something Wyss says highlights that trend.

"I think the consumer is deleveraging in a dramatic fashion," Davidowitz says. "We're in a new world."

Banks also fearful
With job losses threatening consumers' ability to repay loans, banks are also doing their part to limit borrowing -- while still maximizing their profits.

CONSUMERS CONTINUE TO SHED DEBT
In September, Americans' credit card debt fell 13.3 percent, continuing recent trends.

Lines of credit have already been reduced substantially. "Credit cards have been cut by over a trillion dollars, and that doesn't include the additional fees" banks have begun charging, Davidowitz says. From a bank's standpoint, there are not many options. "The only things you can do are raise overall interest rates -- which are already high -- raise fees or lend fewer cards," says Wyss. 

Those tactics are already in use. Although the Fed left interest rates near record lows on Wednesday, banks have been steadily increasing annual percentage rates in preparation for new laws -- set to take effect in February -- that will limit their ability to hike APRs on existing cardholders.

Discover this week became the first major issuer to reveal how its cards will operate under the Credit CARD Act. As early as December, Discover will begin eliminating terms banned by the new regulations. That means existing credit card balances will not see their interest rates suddenly increase, while both over-the-limit and pay-by-phone fees will be eliminated. However, Discover will also raise penalty interest rates and minimum payments and will switch cash advances to variable rates.

Other issuers have also switched to variable rates to take advantage of eventual Fed rate hikes. Variable rates are set using the prime rate, which is 3 percentage points above the federal funds rate. Currently, the prime rate at stands 3.25 percent

When will card balances recover?
Eventually, analysts say, credit card balances will begin to recover. But an increase in revolving credit may not happen until banks adjust to the realities of the new card regulations. "I don't think it's going to change until the new rules get phased in," Wyss says.

That could leave credit card balances on a downward path into 2010. Despite the possibility of a few brief increases in credit card balances, a sustained rise this year is unlikely. "I don't think you'll see any upturn until the second half of next year," Wyss says. 

Published: November 6, 2009

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