Research and Statistics

Fed: Card balances fall first time in 10 months


Credit card debt decreased 1.3 percent in January, the Federal Reserve said Monday, breaking a 10-month streak of expanding card balances.

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Consumers were quick to put away their credit cards when 2016 began. In fact, card debt decreased 1.3 percent in January, the Federal Reserve said Monday, breaking an 11-month streak of expanding card balances.

Total revolving debt — primarily composed of credit card balances — dropped to $935.3 billion in January, an decrease of about $1.1 million from December, according to the Federal Reserve’s monthly G.19 report on consumer credit.

This news follows card debt surges in both November and December 2015, which brought card balances to their highest level since October 2009. Despite today’s slightly negative figures, card balances are still near their highest level since October 2009.

5 ways to improve credit health this month
Just because you aren’t using your credit card as frequently these days doesn’t mean you can’t continue to improve your credit portfolio and score. If you have debt and spending under control, take this month to better your credit. Here are six suggestions for how to do so:

1. Check credit report for errors or fraud. Find something? Dispute credit report errors.
2. Do some research to make sure you are effectively building your credit, not making it worse.
3. Card rate too high? Consider making a balance transfer to save money.
4. Trying to rebuild credit? Don’t open lots of new cards.
5. If you carry a card balance from month-to-month, at least pay more than the minimum amount due.
6. Make sure you understand the fees associated with your credit card so you can avoid unnecessary charges.

However, including revolving and nonrevolving debt, total consumer debt rose $10.5 billion in January to about $3.54 trillion — an annualized increase of 3.6 percent. This balance includes car loans, student loans and revolving debt, but excludes mortgages, so it represents the short-term credit obligations consumers hold in a given month. All figures are seasonally adjusted to account for expected fluctuations.

Consumer spending bounces back
Even though consumers were hesitant to pay with credit cards in January, consumer spending figures were better than expected. Consumer spending increased $63 billion (0.5 percent) in January after a weak $11.6 billion (0.1 percent) increase in December, according to the Commerce Department.

Wages continued to rise in January as well. Overall wages and salaries increased $48.1 billion in January, compared to $18.3 billion in December. Private wages and salaries increased $43.7 billion, compared with an increase of $15.9 billion. Government wages and salaries were also up $4.4 billion, compared to $2.4 billion in December.

These figures are a good indication that spending will continue — credit and otherwise — in the months come, according to Perc Pineda, economist with Credit Union National Association.

“Overall, my sense is that there is continued optimism in the American consumer but there is a little bit of caution not knowing how fast the economy will grow,” he said. However, “I think we should be expecting some continued moderate increases in personal spending in the coming months, now that the economy continues to show steady improvement.”

January’s consumer spending report also revealed that core inflation — which measures the prices of consumer goods excluding food and energy, which fluctuate often — rose 0.3 percent in January and 1.7 percent over the past year. The Federal Reserve has been looking for 2 percent inflation to justify further interest rate hikes and core inflation is now at its highest point in almost three years, according to a TD Bank analysis.

“The American economy is not likely to enter a period of disinflation and that price pressures are indeed beginning to build,” said TD Bank economist Ksenia Bushmeneva. “This should give the FOMC more assurance that their gradual tightening cycle is not impinging on the recovery, ultimately enabling the Fed to raise rates two more times this year.”

Job market shows signs of strength
Reports of decreasing card balances and increased consumer spending precedes February’s employment report, which indicates positive gains were made in the job market last month.

According to the Labor Department, 242,000 jobs were created in February, well above the 195,000 job gains analysts predicted, according to MarketWatch economic predictions.

Furthermore, upward revisions made to December and January’s job creation figures now reflect 30,000 more jobs than previously reported. With such adjustments, employment gains have averaged 228,000 per month over the past three months.

The latest employment report, “Revealed a resilient U.S. economy that continues on a path toward slow and steady growth,” according to Andrew Chamberlain, senior economist for Glassdoor Economic Research, in a note sent to clients.

While the unemployment rate rests at 4.9 percent, the lowest rate since February 2008, average hourly earnings fell slightly in February, according to the Labor Department. Average hourly earnings for all employees decreased 3 cents to $25.35. As a

result, average hourly earnings have increased 2.2 percent over the past year.

This particular statistic should be taken with a grain of salt, according to Ian Shepherdson, chief economist for Pantheon Macroeconomics. A dip in average hourly earnings figures is normal for months during which the 15th — the typical payday for those paid semimonthly — comes after the employment survey data is collected, which is what happened in February.  We might see the same thing in March, “but then there’ll be a huge rebound, putting wage growth year over year at new highs,” he said.

Economy ready for more rate hikes found most credit card issuers increased variable interest rates by 0.25 percent after the Federal Reserve announced its first benchmark interest rate increase in December, but, for the most part, rates have held steady over the past few weeks. However, thanks to this new batch of positive economic reports, this may soon change.

“While inflation is up and unemployment is down, there is reason to believe the Fed will act soon,” Pineda said.

The Federal Open Market Committee will consider the latest signs of economic growth at the next meeting March 15-16, but

it’s unclear if that meeting will result in another benchmark rate increase.

“The Fed should hike on the 16th, but in all probability, they won’t.” Pantheon Macroeconomics’ Shepherdson wrote in a research note sent to clients.

Right now, a mid-summer interest bump seems more realistic, which is good news for balance-carrying cardholders who may need some more time to pay down debt.

“Whether or not it happens in March depends on a lot of factors, like what is going on overseas and investment spending in the U.S,” Pineda explained. “We think that no later than the second half of the year we should be see another Fed rate hike.”

See related: Citi to refund $5 million to cardholders for illegal collections, How and when you can sue a debt collector

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