Consumer credit card balances fell in August
Credit card balances fell in August, new data from the Federal Reserve show, as consumers kept their cards in their wallets for the second straight month.
"Consumers are in a period of extreme lack of confidence and they aren't spending much. And when they are spending, they prefer to use cash," says Greg Daco, senior economist with IHS Global Insight.
The G.19 consumer credit report also tracks other forms of borrowing and those fell as well. Nonrevolving debt, which includes auto, student, mobile home, boat and trailer loans, fell 5.2 percent to $1.65 trillion. The drop was more than enough to push overall consumer credit -- revolving and nonrevolving combined -- down. Overall debt fell 4.6 percent, hitting $2.44 trillion in August, for the largest decline in more than a year. That marks a big change for consumers. Total debt had increased for 10 straight months, while nonrevolving debt had increased for 14 straight months.
When it comes to card balances, however, it's been a choppy few months. After a long string of declines, revolving debt levels rose in May and June, before against heading lower in July and August.
Before the recent turbulence, debt levels were headed steadily lower. For more than two years, credit card balances fell as cardholders used plastic less and paid off existing debts. "Consumers have been trying to push those balances down," George Mokrzan, director of economics for Huntington Bank in Columbus, Ohio, says.
Margarita Vaisman is one of those consumers. A community manager for Google in New York City, Vaisman accumulated nearly $22,000 in credit card debt. She was paying $200 a month in charges alone due to a combination of a few late payments, penalty fees and high interest rates before she decided something needed to change. "Joining Mint.com was the turning point in getting my finances in order," she says. "When I saw all of my debt and investments in one place, I was shocked at how much money I owed versus how much I had. I immediately went on a 'money diet' and curtailed major expenses." She began aggressively paying down debt.
"I had to adjust lifestyle choices and curb my spending impulses. Instead of allowing myself to buy whatever I wanted, I learned to say 'no' more, to hold back, even when I started earning more money. Having so much debt hanging over me made those decisions pretty easy," Vaisman says.
Consumers aren't the only ones who have made changes. Lenders also played a part, as banks approved fewer credit card applications, trimmed their customers' credit lines and charged off unpaid debts they had lost hope of ever collecting. The combined result? Between September 2008 -- when revolving balances peaked at $972.2 billion -- and April 2011, $183 billion in revolving debt was eliminated.
The pullback in consumer spending has had consequences for the larger U.S. economy. "Consumer behavior has both reflected and contributed to the slow pace of recovery," Fed Chairman Ben Bernanke said in testimony before Congress on Tuesday. "Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit. Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market," Bernanke said. Data released Friday showed the unemployment rate in September remained unchanged at 9.1 percent.
But as their earnings dry up, some consumers may have little choice but to pay with plastic. A report from the U.S. Department of Commerce showed that U.S. personal income slipped 0.1 percent in August, marking the first time in two years that workers' earnings have weakened from one month to the next. Personal spending, however, rose 0.2 percent in August. To finance that spending, consumers had to dip into their savings. As a result, the personal savings rate fell to 4.5 percent of disposable income, the lowest level since November 2009. Economists said higher commodity prices are to blame. "The price of essentials going up, that will do it -- that will eat into the savings rate," Mokrzan says.
Some consumers may find that even as they stretch their incomes, they still don't have enough cash left at month's end to pay for necessities, like gasoline for their car. In such emergency situations, consumers realize "to fill up my tank, I need to use my credit card," IHS's Daco says.
FICO looks forward
So what's next for credit card spending? A recent survey by credit scoring giant FICO and the Professional Risk Managers' International Association (PRMIA) surveyed credit risk management professionals for their take on the topic.
The poll results showed nearly half (49.8 percent) of respondents expect their average credit card balance to increase over the next six months. Although the survey didn't ask respondents to explain their predictions, FICO says that while riskier borrowers have avoided spending and reduced their debt levels, that may not also be true for consumers with higher credit scores. "Low-risk consumers have maintained balances and generally continue at the same purchase volumes," Dr. Andrew Jennings, chief analytics officer at FICO, says in an email. Those same low-risk cardholders, however, tend to pay off their account balances in full each month, he says.
Despite the forecast for higher average card balances, a majority of respondents (63.9 percent) say that U.S. consumers' card usage is "unlikely to reach pre-recession levels for at least five years," according to the poll. That, says Jennings, is due to poor consumer confidence in the economy and restrictive lending by banks: 31 percent of respondents expect lending criteria to tighten, while 47 percent expect them to remain the same.
"Thus, credit is going to be harder to come by, which will further constrain the ability to build balances," Jennings says.
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