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Consumer credit card balances rise

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Consumer credit card balances shot up in August after falling two months in a row, according to new data from the Federal Reserve

Revolving debt -- which in the report is mostly made up of credit card debt -- jumped by 5.9 percent in August to $854.9 billion.

August's rise in credit card debt defied economists' predictions. Overall consumer spending rose slightly in August, according to the Commerce Department. However, experts attributed much of that growth in spending to higher gas prices and said consumers have shown few signs that they are ready to start spending freely again, particularly since their incomes have not kept up with the growth in prices. "If you see your spending power declining, that's not a time you want to take on new debt," says Rebel Cole, a professor of finance at DePaul University. 

However, despite the financial uncertainty facing many consumers, it appears that many people are confident enough, for now, that they will be able to pay back their bills. That may change, however, if the economy continues to slide, say experts.

Consumers are contending with an unusually large number of financial uncertainties, including an agonizingly slow economic recovery, financial problems in Europe and a small but genuine chance that the U.S. could be thrown back into recession in 2013 if U.S. leaders fail to stop automatic spending cuts scheduled for Jan. 1.

Many are also still struggling with high levels of debt, says Dan Seiver, a professor of economics at Cal Poly San Luis Obispo. "Households took on way too much credit card debt, too much mortgage debt," says Seiver. "And we're still suffering for it."

Consumers do have some reason to feel slightly more confident going forward, however. The same day that the G.19 consumer credit report was released, the Labor Department announced that the unemployment rate fell to 7.8 percent in September -- the lowest rate since the beginning of 2009.

The Fed's 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 9 percent to $1.9 trillion in August. Overall consumer credit -- the combination of both revolving and nonrevolving debt -- also increased, by $18 billion, after sliding the previous month. Total consumer debt is now $2.7 trillion.  

Slow-buying consumers, slow recovery
Consumers aren't just borrowing more overall. They're also paying their credit cards off faster, say experts, and are missing fewer payments. Late payments on credit cards fell to their lowest levels in 11 years, according to the American Bankers Association latest Consumer Credit Delinquency Bulletin.

James Chessen, chief economist at the ABA, says the group's newest figures underscore the fact that consumers are determined to rebuild their finances and create a financial cushion in order to help shield themselves from potential blows to the economy.   

"The shock of the financial crisis, particularly on net worth, was so severe that people feel they need to build a security blanket to protect them from any future downturn," says Chessen. "People are still not convinced that the economy is bolting forward and they are trying to build a cushion that they didn't really have before."

According to the report, the percentage of credit card accounts that were delinquent for 30 days or more in the second quarter of 2012 dropped to just below 3 percent of all accounts. The last time that many consumers paid their credit card bills on time was in 2001 when the economy was much healthier.

Today's credit card holders are also paying down their balances at a much faster rate than is typical, says Chessen. "So it really shows a desire to deleverage and do better," Chessen says.

That said, delinquencies spiked in some categories in the second quarter of 2012, including in home related loans, which shows that some consumers are still struggling.

"What really struck us was, in the first quarter, we saw very broad-based improvements in all the categories we track," says Chessen. However, the second quarter was a very weak quarter for the economy, Chessen says, and that weakness was reflected in the number of consumers who fell behind on other types of payments.

Despite weakness in some credit categories, the drop in bank card delinquencies is good news for credit card issuers, which depend on a healthy customer base to expand the number of loans they give out to new cardholders. However, issuers are remaining cautious about the loans they extend, says Chessen, and are unlikely to ratchet up the amount of credit they give out to new customers until the economy significantly improves.

"Banks are a reflection of the economy," he says. "They are there to meet the demands of consumers for credit card loans, personal loans, car loans. If the demand is not strong for those purchases, it naturally means the amount of credit extended will be less." In addition, says Chessen, "the risk of lending becomes less when the economy starts expanding and new jobs are created and incomes grow."

Experts: Cautious consumers are better for growth
Consumers may be more willing to take on some debt now. However, they aren't charging huge amounts, caution experts. And that's a good thing, they say. In the short-term, consumers' reluctance to overspend is a serious drag on the U.S. economy and is a major reason why it's taking the country so long to recover from one of deepest downturns in U.S. history, say experts. "The economy we live in is a consumption economy," says DePaul University's Rebel Cole. "Things are not going to get ratcheted up until consumer spending goes up."

However, experts also say that consumers' stubborn caution toward taking on too much debt is good for the economy in the long-run and could help the U.S. crawl back toward a more sustainable recovery, despite the short-term pain.

"Aggregate demand has to be stronger if we're going to get the economy to grow faster," says Cal Poly San Luis Obispo's Dan Seiver. "But if we're going to do that by having consumers spend money they don't have, then we'll set ourselves up for another nasty crisis."

Instead, Seiver says, the economy is better off in the long run if more consumers save larger portions of their income and invest it, rather than spend it on interest payments. "It hurts retail in the short run, but it probably increases our growth rate in the long run," says Seiver.   

However, it's too soon to tell whether consumers will continue to remain relatively cautious -- or if they will return to the old days of charging more than they can afford. "We're inundated with ads from birth and that makes it really hard to change consumer habits," says Seiver.

See related: 10 surefire ways to get errors off your credit reports, Fed: No rate hikes until at least 2015

Published: October 5, 2012


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