Research and Statistics

Credit card balances fall by nearly $10 billion in August


Credit card balances plunged by nearly $10 billion in August, according to new Federal Reserve data, marking the 11th straight month of decline amid an ongoing change in consumer and lender attitudes toward plastic.

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Credit card balances plunged by almost $10 billion in August, according to new Federal Reserve data. This marks the 11th straight month of decline amid job losses and an ongoing change in consumer and lender attitudes toward plastic.

Consumer debt takes
another big fall
Consumer debt has fallen hard in recent months, including a big drop in August. The below chart breaks down how much of the overall debt comes from revolving debt — nearly entirely made up of credit cards — and how much from nonrevolving debt — such as car loans or student loans. All numbers are in billions of dollars.

On Wednesday, the Fed released its monthly G.19 report on consumer credit. That report looks at various components of consumer debt, including revolving credit — a loan category comprised almost entirely of credit card debt — as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers.

The latest G.19 report showed that revolving credit plunged at an annualized rate of 13.1 percent in August, following a drop of 3.1 percent in July. The August monthly drop is the 11th in a row, dating back to October 2008, the longest on record. Overall, revolving debt fell to $899.4 billion from a total of $909.3 billion in July.

Nonrevolving credit dropped just 1.6 percent in August to $1.563 trillion. Taken as a whole, consumer debt fell $12 billion to $2.463 trillion in August — the seventh straight monthly drop, dating back to February. The last time overall consumer credit fell for seven straight months was in 1991. It has never fallen eight months in a row since the Fed begin tracking it in 1943.

That just might change next month. The unemployment rate hit 9.8 — a 26-year high — in September, according to data released earlier this month, and most analysts don’t expect that picture to dramatically change soon. Until it does, experts expect card balances to keep falling.

“The jobs picture has gotten bleak, and consumers don’t spend in that environment. And more importantly, banks don’t lend in that environment,” says Richard Yamarone, director of economic research with Argus Research.

Three key factors
Chris Brendler, managing director with Stifel Nicolaus in Baltimore, says that ongoing pullback in credit card debt can be attributed to three factors: consumers’ efforts to pay down debt and avoid card use, banks’ reduction of credit lines available to consumers and sweeping credit card industry reforms set to be enacted in February.

For example, the Credit CARD Act “encourages the credit card companies to pull back on the use of intro rates and teaser rates,” Brendler says. He notes that Discover indicated that the number of its teaser offers, which declined in the third quarter, will continue to fall through the end of 2009.

Credit card debt plunges in August
Consumer credit card debt dropped more than 13 percent in August, as job fears prompted Americans to rein in their debt.

Such behavior by banks is weighing on credit card debt, Brendler says, since cardholder spending tends to be encouraged by low interest rates offered by banks. “As they pull back [those offers], you see those balances decline,” he says.

Additionally, Brendler says job losses are unlikely to help reverse the direction of falling credit card balances despite some predictions that the unemployed will be forced to cover their expenses using plastic. “I think that’s being overshadowed by people looking to pay down debt,” he says.Yamarone agrees that employment levels won’t slow falling credit cards balances, noting that banks have already taken steps to prevent overuse by the unemployed. “They’re slashing limits faster than consumers can rack up charges,” he says.

Despite rising unemployment levels, around 90 percent of consumers are still employed, Brendler explains. So don’t expect the revolving credit portion of future G.19 reports to get a boost from the unemployed.

In fact, “as long as joblessness remains concern No. 1, you’re not going to see people spending and you’re not going to see bank improving lending  terms,” Yamarone says.

Move to debit
Among those consumers who are still shopping, an increasing number of purchases are being put on debit cards. “You’ve also seen a pretty big shift away from credit cards toward debit cards,” Brendler says. Debit cards now make up more than half of all transactions that don’t involve cash, based on an August 2009 study from advisory services firm TowerGroup, compared with just 1 percent of transactions 15 years ago.

Retailers confirm that trend. The National Retail Federation, which yesterday forecast a 1 percent decline in holiday sales, has indicated that when putting purchases on plastic, consumers are choosing debit over credit.

See related:A comprehensive guide to the Credit CARD Act, Another downbeat holiday ahead for retailers?

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