Consumer credit card debt grows in October
Consumer credit card balances edged higher in October, defying
experts' expectations, according
to new data from the Federal Reserve.
CONSUMER CREDIT CARD DEBT CREEPS HIGHER
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In October, consumer credit card debt edged up by 0.6 percent for the second straight month. The chart below graphs Americans' credit card debt totals from their peak of $972.2 billion in August 2008 through October 2011, when debt stood at $792.3 billion.
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The Federal Reserve's latest G.19 consumer credit
report showed a 0.6 percent rise in revolving debt as more consumers let their credit
balances swell. Revolving debt, which is
made up almost entirely of credit card debt, rose by $300 million in October to
$792.3 billion. The increase surprised experts who expected that consumers would remain
cautious before breaking out their cards for the holidays.
Experts' conservative predictions are easy to understand given previous G.19 reports. The Fed reported last month that card balances had decreased for three straight months. However, the agency frequently revises its data and revised its September numbers
upward this month. The result: October's increase means that credit card balances have gone up for two straight months for just the second time since the recession began in 2008.
"It could mean that consumers are feeling more
confident about using their credit card and pulling their credit card out of
their wallet," says Gregory Daco, senior economist with IHS Global Insight. Or
it could mean they are finally ready to buy items they've been putting off due to a recessionary climate that's lasted four years.
"American households have been in either recession
mode or recovery mode for about four years now," says Daco. "There is pent-up
demand for goods that is very gradually coming out. Consumers who weren't able
to purchase a fridge or a dishwashing machine or a car ... may decide that now is
the time to make those purchases because their situation has improved
slightly."
The Fed's monthly G.19 consumer credit report also
looks at nonrevolving debt, which includes auto loans, student loans and loans
for mobile homes, boats and trailers. Nonrevolving debt went up 5.3 percent to
$1.67 trillion. Overall consumer credit -- the combination of both revolving and
nonrevolving debt -- also increased for the second straight month, after seeing
a rare decline in August. Total consumer credit jumped by 3.7 percent in
October, hitting $2.46 trillion.
Pent-up
consumer demand
Despite
a bleak economic backdrop and sour national mood, consumers appear to be
feeling more confident about letting loose with their spending. Retail sales
rose 0.5 percent in October, according to the Commerce
Department, and early sales reports from Black Friday and Cyber Monday reported
by Thomson Reuters indicate that sales grew further in November as shoppers
took advantage of steep discounts.
"Consumer confidence levels are still at recessionary
levels, but we're still seeing spending," says Daco.
Consumer confidence levels declined sharply in
October, according to the Conference Board's Consumer Confidence Index, after suffering
a steep plunge in August and recovering just slightly in September. Meanwhile,
the unemployment rate remained high in October, according to the Labor
Department. Experts predicted that consumers would respond to this poor
economic climate by remaining cautious in October and keeping their cards in their
wallets.
Cardholders have fitfully reduced their credit card
balances since the peak of the recession and have largely avoided taking on
high-interest debt in an uncertain economy. But those long years of frugality may
have finally pushed consumers to the brink, says Tony Plath, a professor of
finance at the University of North Carolina at Charlotte.
"We've
been unemployed for four years, we've been on an austerity budget, and now
people are just getting weary of not spending money," says Plath.
Consumers' conservative spending habits may have also
given them a little more breathing room to spend more going into the
holidays, says Plath. "People have a little bit of wiggle room," says Plath.
Plath expects a temporary increase in holiday
spending, but he says that spending will likely screech to a halt in 2012 when
consumers confront bigger credit card balances and an economy that can't
rebound fast enough to keep up.
"There's a psychological pent-up need to shop," says
Plath. As a result, we could see "a temporary return to consumer patterns we
saw in 2006 and 2005 where people shop ‘till they drop. Essentially, it's a
little shot of nostalgia for the good old days."
However, "come March and April, this nostalgia will
see a wake-up call from a sick economy," says Plath, and consumers will once again
realize that overspending in a weak economy is "not sustainable."
Experts predict that increased spending toward the end
of 2011 could also lead to higher bank losses in 2012 as more consumers
struggle to pay their credit card bills.
"Historically and traditionally, what happens is that
during the holiday season people go in and shop and then six to seven months
[later], you see an increase in losses," says Dennis Moroney, research director
in the bank cards division with advisory services firm TowerGroup.
Fewer
choices
Lingering unemployment and stagnant wages may also be pushing card balances up,
say experts. Consumers may want to be more cautious, but may feel forced to use
credit to pay the bills.
"With continued high unemployment rates, people
really start to use their credit cards as a means of financing their living
expenses," says Moroney.
Personal income rose 0.4 percent in October, according
to the Commerce Department. However, Daco notes that when you factor in the
increased cost of living, the amount that consumers have left to spend is
actually less. "If [consumer] income is adjusted to the cost of life, it means
they're not earning as much as in the prior quarter." says Daco. That makes it harder for consumers to pay for
what they need without relying on a credit card.
Some experts also predict that as issuers begin to
loosen their lending standards, card balances could grow as a result. "I think
you're going to see more people with spotty credit receiving card offers," says
Howard Dvorkin, chief executive of the nonprofit counseling and debt management
company ConsolidatedCredit.org. "That will expand the offers and you'll see
more people overall using credit cards."
See related: Infographic: Shoppers looking to buy this holiday, but do so wisely
Published: December 7, 2011
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