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Credit card balances pick up for the second month

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Consumer credit card balances inched up in November 2012 for the second consecutive month, according to the Federal Reserve's latest G.19 consumer credit report. However, November's increase in debt was tiny compared to October's nearly 5 percentage point rise. 

Revolving debt -- which in the report is mostly made up of credit card debt -- rose by just 1.1 percent in November to $858 billion.

November marked the fifth month of 2012 in which consumer credit card balances rose. Despite intermittent drops in credit card usage, Americans appear to have taken on slightly more credit card debt in 2012 than they did the previous year.  

Overall, revolving debt grew by $6.9 billion in the first 11 months of 2012 -- a positive sign that Americans are slowly warming back up to credit after largely rejecting it in the immediate aftermath of the Great Recession.

"It's a slow growth economy, but it's moving in the right direction," says David Nice, an associate economist with Mesirow Financial in Chicago. "People are not only willing to take on more credit card debt, but I think creditors are more willing to give out credit."

Student loans continue to drive growth
Overall consumer credit -- the combination of both revolving and nonrevolving debt -- grew by $16.1 billion in November alone and by $137 billion in the first 11 months of 2012.

While credit card debt grew in fits and starts, the most significant growth in consumer debt in the past year came in nonrevolving debt, a category that includes auto loans, student loans and loans for mobile homes, boats and trailers. Student loans were the big culprit, contributing a majority of growth, says Paul Edelstein, director of financial economics at IHS Global Insight.

However, U.S. auto sales also spiked in 2012, which experts say could signal that consumers are feeling significantly more confident about their finances and may be ready to spend more heavily in 2013. A pickup in auto loans is "a sign that people are willing to commit to these big-ticket purchases. They have the confidence to do so, they have the willingness to do so. It's very bullish."

Growth in credit card debt, by contrast, is harder to interpret, cautions Edelstein, because there are a number of factors that could cause people to put more debt on their cards.

For example, growth in revolving debt could mean consumers are more confident about spending their disposable income on retail and entertainment, rather than just on household essentials, such as food and gas. However, "it can also mean they don't have the income to pay their bills and they have to rely on credit cards," says Edelstein.    

Looking ahead to 2013
If the U.S. economy were a car, experts say the 2013 model will look much like 2012's -- but maybe a bit faster.

Employers are expected to continue adding jobs to the U.S. economy, rather than subtracting them. However, they are likely to do so at a similar slow but steady pace.

In December 2012, for example, employers added 155,000 jobs. That's up from 146,000 in November, according to the Labor Department. But the pickup in jobs wasn't enough to push the overall unemployment rate down, which remains stuck at 7.8 percent.   

Consumer credit use is also expected to rise in 2013; but the majority of that growth will continue to be driven by student loans, predicts IHS Global Insight's Edelstein.

Experts expect that credit card debt will continue to slowly pick up throughout the year. But its growth is unlikely to be steep and may be more volatile in the early months, as consumers react to continuing uncertainty about fiscal policy and slightly higher payroll taxes.   

The payroll tax holiday that's been in place since 2010, for example, has expired, leaving the majority of taxpayers with an additional 2 percent bite out of their monthly paychecks. The loss of income could force consumers to pull back their spending temporarily, say experts.  

"I think it's going to catch a lot of people by surprise," says Edelstein. "I don't think people really saw it coming. Because it's sort of a shock, you're going to get more of a response from households."

That said, consumers may also react to the higher monthly taxes by using their credit cards more heavily as they try to make up for the sudden loss in income, says Mesirow Financial's Nice. "People don't like to have their standard of living abruptly adjusted," he says. So they may "use their credit cards to smooth that out."

Card delinquencies fall to record 18-year low
Regardless of what happens in the early months of 2013, consumers are starting out the year much healthier than they have been in the past few years. For example, credit card late payments fell to an 18-year low, according to the American Bankers Association's most recent Consumer Credit Delinquency Bulletin.

"Consumers are paying a lot more attention to the level of debt they have and are trying to pay it down at a faster rate," says James Chessen, chief economist at the American Bankers Association. Banks, meanwhile, are still aggressively charging off loans that they don't expect to be repaid, he says, and are remaining careful about the loans they extend.

That, in turn, has led to a population of credit card holders who are much more likely to remain in good standing with a credit card issuer and repay bills.

As the economy slowly improves, Chessen expects that banks will react to the healthier population of consumers by loosening their grip on the amount of credit they're willing to extend. Banks may also take a second look at consumers with less than perfect credit scores, he says, and try to reach a broader base of customers. "In a growing economy, the risk of lending is much less than an economy that is slipping into recession," says Chessen.

Chessen also expects that consumers will react to the improved economy by gradually taking on more debt. "People borrow when they feel they have the capacity to repay their debt," he says. "The environment for consumers is much better than what it was before. I think consumers are going to become more confident now that they've built a base or a buffer to protect themselves and will be more anxious to buy things they put off for the last few years."  

See related: 2013: What's in the (credit) cards for you?

Published: January 8, 2013



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