Research and Statistics

Fed: Consumer credit demand up, even as debt falls


Consumers may have increased access to credit cards, but they nevertheless continue to cut debt levels, a pair of new Federal Reserve reports show

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Consumers may have greater access to credit cards, but they nevertheless continue to cut debt levels, a pair of new Federal Reserve reports show.

The chart below shows the percentages of banks that tightened specific lending standards for new credit card applications in the third quarter of 2011 and in the second quarter of 2008, when credit tightening was at its peak. The chart also shows the percentage of banks who said they took certain specific actions regarding new and existing credit card accounts.
ActionQ3 2011Q2 2008
For new applications
Loosening overall lending standards7.9%0%
Tightening overall lending standards0%66.6%
For new applications and existing accounts
Lowering credit limits2.8%47%
Raising minimum payments5.6%10%
Raising credit score requirements2.8%57%
Refusing to lend to those who don’t meet all lending standards2.8%50%

In the monthly G.19 consumer credit report and the quarterly senior loan officer’s survey, the U.S. central bank showed that although access to credit — and consumer demand for credit — continues to improve from low levels seen in the depths of the recession, cardholders are adamant about paying down their debt.

Based on data from the Federal Reserve’s latest G.19 report on consumer credit released Monday, revolving credit — almost entirely made up of credit card debt — dropped 1 percent to $789.6 billion in September. The G.19 consumer credit report looks at more than just consumers’ card balances: Nonrevolving debt, which includes auto, student, mobile home, boat and trailer loans, rose 5.8 percent to $1.66 trillion. Overall debt rose 3.6 percent, hitting $2.45 trillion in September. Both the nonrevolving total and the overall debt total increased after seeing rare drops in August.

The senior loan officer survey, a quarterly poll of U.S. banks regarding their lending practices, meanwhile, showed that a small number of banks eased credit card approvals, credit limits and interest rates in favor of customers. Consumers, in response, slightly increased their demand for plastic, the report indicated.

Paying down debt
Credit card debt levels have been declining since the recession began. Between September 2008, when revolving balances peaked at $972.2 billion, and April 2011, $183 billion in revolving debt was eliminated, as borrowers cut this type of debt and banks were hesitant to lend. In recent months, there have been occasional month-to-month increases in credit card balances — a small increase in February and larger ones in May and June — but balances have fallen steadily for three straight months since then.

The “continued reduction of credit card debt probably reflects several factors that include not only consumer determination to pay down expensive debt but also continued bank write-offs of uncollectible debts and greater vigilance in preventing individuals from running up huge credit card debts,” says Stephen Brobeck, executive director of the Consumer Federation of America. Write-offs occur when banks give up ever collecting on unpaid accounts and simply take those accounts off their books.

For some consumers, adding more revolving debt would simply worsen an already challenging financial situation. The Labor Department reported Thursday that the unemployment rate declined to 9 percent in October, down slightly from 9.1 percent in September, but not significantly changed from the jobless rate over the last seven months.

Without a paycheck, however, some U.S. workers may have little option but to put expenses on plastic. Credit bureau Equifax’s latest National Credit Trends Report shows that although total outstanding debt continues to decrease, consumers are starting to increase their use of bank credit cards and retail credit cards. Equifax says that both those card categories saw balances increase between June and September 2011 after previously declining between February and May 2011.

Lending eases, demand improves
That increased demand was echoed in the Fed’s survey of loan officers. According to the survey, 17.6 percent of banks described demand for credit cards as “moderately stronger” in the third quarter. However, 73.5 percent said demand was “about the same,” while 8.8 percent called it “moderately weaker.”

Consumers may have been responding to a slightly warmer lending environment. “Small numbers of banks reported having eased some terms on credit card loans,” the Fed said.

What were those terms? During the third quarter, 8.1 percent of banks eased standards for card applications, 8.6 percent of banks increased cardholders’ credit limits and 8.6 percent lowered interest rates. The banks all said they had “somewhat” loosened these standards, as opposed to “considerably” loosening them.

Consumer advocates say consumers may be using this opportunity to get new plastic. “Consumers pulled in by paying off credit and hopefully improved their scores during the past few years, so they may be taking advantage of a period of greater access and maybe even lower rates to get new cards,” says Linda Sherry, director of national priorities for the nonprofit Consumer Action. “As long as they are not going to start carrying large balances again, this looks like a strategic move,” Sherry says.

But not all the banks’ changes made borrowing easier for cardholders: 5.7 percent of respondents said they slightly increased their customers’ minimum monthly card payments. Meanwhile, 2.9 percent said they became “somewhat” less willing to lend to borrowers with low credit scores.

In the end, consumer advocates say the economic downturn may have encouraged consumers to be more careful. “This economy has taught a lot of people that it is not a good idea to carry a heavy debt load, especially on credit cards,” Sherry says.

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