Research and Statistics

Card debt falls in February


Credit card users cut their balances sharply in February 2014, even as personal income rose, says the Federal Reserve’s monthly consumer credit report

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Debt on credit cards fell sharply in February, the Federal Reserve announced Monday, extending January’s slide for a second month despite an overall uptick in consumer spending.

Revolving debt, which is mostly made up of credit card balances, shrank at a seasonally adjusted annual rate of 3.4 percent to $854.2 billion, according to the Federal Reserve’s monthly report on consumer credit. In January, card debt declined at a 0.3 percent rate.

Total short-term consumer debt was up, however, rising by 6.4 percent to $3.13 trillion, the Fed said in its monthly G.19 report. Total consumer debt adds student loans, car loans and other installment loans to credit card debt.

“Spending on goods picked up some, which leaves us hopeful that the consumer will come back in full force as the snow melts,” TD Economics Senior Economist Michael Dolega said in a research note. Unusually harsh winter weather put a chill on consumers’ activity in January. Consumer spending was up 0.3 percent in February, a rise of $30.8 billion. Personal income also rose 0.3 percent, the U.S. Commerce Department said.

Rising income gives consumers the confidence — and resources — to spend more, and credit cards are a favorite tool for spending.  On the other hand, more income also provides firepower to pay down existing balances on cards. Of those two effects, “I think we’re going to see some of both,” said David Ely, an economist and finance professor at San Diego State University.

Card use shifts
Some consumer spending has shifted away from goods typically bought with credit cards — and that’s not a bad thing for household budgets, economists said.

“I think it’s a healthy response,” said James Johannes, economist and finance professor at the University of Wisconsin. He said that since 2010, purchases of durable goods — such as cars and appliances — have grown faster than spending on clothes, food and other nondurables.

“The contribution that consumption has been making to GDP is just going down,” he said. “It’s coming more in durable goods — that’s not credit card stuff.”

The spending shift is reflected in the makeup of consumers’ short-term debt. In 2013, revolving debt grew 1.3 percent, compared to a 7.9 percent rise in nonrevolving  debt. In 2012, revolving debt was up just 0.4 percent while nonrevolving debt rose 8.7 percent.

In a report April 2, the American Bankers Association said people are using credit cards more for making transactions, and less as a tool for borrowing. The average balance fell more than 5 percent during the third quarter of 2013, the study found, even though transactions on cards were up. Card debt was 5.4 percent of disposable income, “near the lowest level in more than a decade,” the ABA said.

The people who would have abused their credit card have been washed out of the system.

— James Johannes
professor, University of Wisconsin

Johannes said that write-offs during the recession purged many card users from the rolls, leaving lower-risk users who take on less debt. “The people who would have abused their credit card have been washed out of the system,” he said.

Some reduction in card balances is the result of banks writing off bad debts, making it complicated to interpret changes in total balances. Write-offs played a major role in the plunge of card balances during 2009 and 2010, but are relatively small now, as late payments hover near record lows. The delinquency rate on card balances was 2.39 percent in late 2013, the bankers’ association said, the lowest rate since at least 1991.

Warming trend
Consumers’ borrowing decisions come amid gradual improvement in the job market. The unemployment rate in March held steady at 6.7 percent — the same rate as February — as the economy saw a healthy influx of new job openings, and a surge of job seekers to fill them.

However, the underemployment index is 12.7 percent, counting both jobless people and those who are working part-time because they can’t find full-time work. “There are still a lot of people who haven’t returned to the labor force, or are working in part-time jobs,” Ely said.

The Fed is looking for the job market to get healthier before raising interest rates — a move that will hit card users in the wallet. In her first meeting as Fed chair in March, Janet Yellen indicated that the economy has a way to go before that step, saying there’s still “substantial slack in the labor market.”

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