Consumer credit card balances drop for the second month in a row
Consumer credit card balances fell for the second
straight month, according to data released Friday by the Federal Reserve. However, it's
unclear whether consumers are still paying down their holiday debt or are cutting
back on spending with credit.
The Federal Reserve's latest G.19 consumer credit
report showed a 3.3 percent drop in
revolving debt as cardholders shied away from racking up more debt. Revolving
debt, which is made up almost entirely of credit card debt, declined by $2.2 billion in February to $798.6 billion.
February's drop in credit card debt defied experts'
expectations that card balances would rise. "It's always difficult to
tell," says Paul Edelstein, director of Financial Economics at IHS Global
Insight. However, the economy showed significant improvement in February and
experts predicted that cardholders would respond to the good news by carrying
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 7.7 percent to $1.7 trillion. That was enough to overwhelm the drop in credit card debt, so overall consumer credit -- the combination of both
revolving and nonrevolving debt -- increased by 4.25 percent, hitting $2.5 trillion.
spend, but not on plastic
possible that cardholders may just be busy paying down the debt they piled up
during the holidays, agrees Edelstein. However, he expects that balances will eventually
rise. "I don't think consumers are retrenching either in their spending
habits or their willingness to take on debt." After all, spending was robust in February, he adds.
Indeed, consumer spending rose by nearly a full
percentage point in February, according to the Bureau of Economic Analysis, and
retail sales rose significantly as well, says the National Retail Federation.
However, some experts worry that rising gas prices may be
dampening consumers' enthusiasm. "While February sales certainly present
continued reason for optimism, retailers are paying close attention to rising
gasoline prices, which are forcing millions of customers to spend a significant
portion of their income filling their gas tanks," said NRF President and
CEO Matthew R. Shay in a statement.
Gas prices rose steadily in February, according to
Consumer Reports, and experts say that can have a big effect on consumers'
ability to take on more debt. "When gas prices go up, that works against
consumers' ability to afford more debt because it takes money out of their
pocket," says Michael Walden, a professor of economics at North Carolina
State University. It also affects them psychologically, he says. When consumers
drive by signs with $4 gas every day and see the numbers go up when they fill
their tank, they start to pull back on their spending. "It really has an
overweighted impact on consumer confidence."
Uncertainty about the economy's future also plays a major
role in consumers' willingness to take on debt. "Consumers don't like it," says IHS Global
Insight's Paul Edelstein, and neither do businesses. "They feel better
when they have a handle on what their job prospects are going to be, what their
income is going to be, what their taxes are going to be." And even though
there has been good economic news on the jobs front, there are a number of uncertainties
on the horizon, he says, including the 2012 elections.
That said, credit card lenders are feeling notably more optimistic,
according to FICO's quarterly survey of bank risk professionals. The survey found that fewer lenders expect consumers to miss their credit card payments and a larger number expect to hand out more cards than they did the first several years after the recession. "They need new customers," says Dr. Andrew Jennings, chief analytics
officer at FICO and head of FICO labs. "Lenders have to get back to lending because basically they make money by lending."
That could mean more cardholders -- and more debt -- in the future, especially as lenders become more aggressive in scoping out new customers. "In the FICO business, we're seeing an uptick
in the use of FICO scores in prospect marketing," adds Jennings (which, in industry-speak, means lenders are aggressively looking for new cardholders). "We've also seen
a recent uptick in the volume of scores used for mailings and credit card
solicitations so that's another indication lenders are willing to lend."
Published: April 6, 2012
Three most recent Research, statistics stories:
- Collectors see less credit card debt – Credit card holders are less likely to get calls from a debt collector than in the past, because collectors have less card debt to pursue, industry surveys say ...
- Poll: As card fraud rises, so do false alarms – As data breaches soar, so do credit card fraud false alarms that block or flag legitimate credit card transactions, says a new CreditCards.com poll ...
- Fed: Card debt rises sharply in April – Balances on credit cards soared at a 12.3 percent annual rate in April, extending March's modest gains despite consumers' continued reluctance to open their wallets, according to the Federal Reserve's monthly consumer credit report ...