Research and Statistics

Fed: Credit card balances shot up October


Consumers “tuned out the drama in DC” and went shopping in October, boosting credit card balances at an annualized rate of 6 percent, the Federal Reserve reported

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Americans shrugged at the federal government shutdown and bulked up their credit card balances vigorously in October.

The Federal Reserve’s measure of revolving debt rose at an annual rate of 6.1 percent in October to $856.8 billion, on a seasonally adjusted basis. The revolving debt figure is mainly made up of balances on credit cards.

The Fed also revised its previous revolving debt reading for August upward to positive 1.4 percent, from negative 1.2 percent, putting the results for the third quarter modestly in the positive column, at 0.4 percent.

Overall short-term consumer debt, which also includes student loans and financing for cars, boats and mobile homes, rose 7.1 percent to $3.076 trillion, according to the monthly G.19 report released Friday.

“Lower gasoline prices freed up a considerable amount of cash for consumers in October, and they appear to have tuned out the drama in D.C. and gone shopping,” Regions Bank Chief Economist Richard Moody said in an analysis. Inflation-adjusted sales beat analysts’ expectations and rose 0.4 percent in October, despite a downturn in consumer sentiment.

The shutdown effect
The federal government’s 16-day partial shutdown in October furloughed 800,000 workers and heightened fears that political gridlock might keep the economic recovery in the slow lane. But the impact of the shutdown was muted because workers were out a relatively short time, and they received back pay.

Did federal personnel and laid-off defense workers swipe their cards more to maintain their purchasing power?

“You might have seen some of that, but it would have been pretty quickly reversed,” Moody said. “That was such a short time — and you’re talking about a relatively small sliver of the population.”

Unlike other forms of consumer debt, borrowing on credit cards has largely flat-lined since a recession-induced slide in balances bottomed out in 2011. By itself, October’s surge does not signal a break from that pattern. Card balances now make up about 28 percent of consumers’ non-housing debt, down from 38 percent in 2008, according to the G.19 report.

Consumers aren’t the only ones exercising caution. Bankers are more willing to make auto loans, secured by property, than to hand out new credit cards, according to the Fed’s survey of senior loan officers.

Cheery unemployment numbers announced Friday should brighten spirits going into the holidays, and might uncork household spending. The Labor Department said that the jobless rate fell sharply to 7.0 percent in November as job creation accelerated. Economists say that a healthy job market is the biggest driver of consumer optimism.

With 203,000 net new jobs, November’s report “is unequivocally a great one and is indicative of a labor market that is finding its rhythm,” TD Economics Senior Economist Michael Dolega said in a research note. The showing means the Federal Reserve is more likely to begin reducing its support for low long-term interest rates before long, he said. However, short-term rates that determine variable credit card APRs are not expected to rise until unemployment improves a good deal more, to 6.5 percent.

Even as retailers mobilize their seasonal sales push, it remains to be seen if consumers will relax the financial discipline they’ve gained since emerging from the Great Recession.

“I don’t think anyone feels warm and fuzzy yet,” said Dennis Carlson, deputy chief economist at Equifax.  Consumer sentiment reached a low for the year in October amid the federal budget impasse. “Folks have been trying to pay down cards, and using cards more to make purchases that they will pay off.”

One strategy is to compartmentalize debt on separate cards to minimize costs, he said. You can use one card for ordinary transactions and pay off the monthly balance in full, avoiding finance charges.  A larger purchase can go on a separate card, if it will take more than a month to pay off.

Store cards see strength
Although consumers are cool to bank cards, the credit bureau has seen enthusiasm for store cards increase, as stores warm up to applicants with tarnished credit. For the year through August, merchants issued 8.2 million cards to subprime borrowers, a six-year high for the period, Equifax found.

The push from stores could intensify as the selling season heads into its final weeks, Carlson said. At the mall and online, discounts and interest-free periods connected to store cards seem to be everywhere.

“Having been out and about this holiday season, I know a lot of stores are pushing financing,” he said. While buying a $450 keyboard for his daughter at Sam Ash, “the salesman was really pushing the store card.” Then there was the sign he spotted on the roadside in Florida that said “Puppy Financing Available.”

Carlson was able to resist both come-ons, however, and he suspects many consumers are doing the same. “One thing we’re seeing is the disciplined consumer,” he said. “People want to get good deals, but they’re also mindful of accruing new debt.”

See previous story: Credit card balances extend their slide

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