Credit card debt surges in June

By Jeremy M. Simon

A rise in credit card debt paced a June acceleration in borrowing by U.S. consumers, according to a report from the Federal Reserve. Consumer credit, or nonmortgage loans to individuals, increased $10.27 billion, or 5.7 percent at an annual rate, to $2.19 trillion. That came on the heels of an upwardly revised $5.89 billion rise in May, and far outpaced economist forecasts for a gain of $3.7 billion in June. The latest two-month gain was the largest since September to October of 2004.

Economists explained that U.S. consumers are relying more on credit card debt because rising interest rates and a cooling housing market make it tougher for them to take out home-equity loans. Costly gas prices are also encouraging consumers to borrow more. Some analysts noted that the jump in consumer credit alongside spiking gasoline prices might suggests some financial woes on the part of borrowers, with consumers relying more on credit cards as other credit options such as mortgage refinancing have been closed off to them.   

Revolving debt, such as credit cards, advanced by 9.8 percent, or $6.65 billion, in June following an 11 percent jump of $7.42 billion rise a month earlier. Nonrevolving debt, such as loans to purchase cars and mobile homes, added $3.62 billion in June after falling $1.54 billion the month before. 

The Federal Reserve's campaign to cool inflation has spurred the cost of credit-card borrowing upward. The average rate on a credit card rose to 13.14 percent in May 2006 from 12.76 percent a year ago, according to Fed statistics.    

Meanwhile, a cooling housing market is lessening demand for home-equity loans. In June, sales of existing homes, which comprise 85 percent of the market, slipped 1.3 percent to the lowest level in five months. The Mortgage Bankers Association's index of applications to buy a home or refinance an existing loan fell 1.2 percent in the last week of July to the lowest level in over four years.

Instead, consumers are turning to credit cards, with American Express, Bank of America, JPMorgan Chase and Citi all posting higher second-quarter earnings from credit cards, in part because a  law making it harder for Americans to file for bankruptcy protection led to fewer defaults.

However, economists predict continued weakness on the consumer side, as the weaker housing market means there is less opportunity to use home equity.  Additionally, a slowing job market may limit consumer borrowing and spending.   

Published: September 6, 2006

	Three most recent Legal, regulatory, privacy issues stories: Q&A with Holly McCall, champion of the stay-at-home parent – Turned down for a Target card because issuers cannot consider household income anymore, McCall got so mad she's campaigning for change ... Winners and losers 3 years after Credit CARD Act – Three years after President Obama signed the Credit CARD Act of 2009, consumers are better off, there are fewer complaints and huge interest rate hikes haven't come to pass ... The latest privacy invasion: retailer tracking – Credit and debit card purchases leave a surprisingly detailed purchase trail. What can you do to protect your privacy? ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!