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Credit card use drops sharply again in December

Consumers sharply reduced their credit card balances in December, according to monthly data from the Federal Reserve, as even the holidays weren’t enough to drive spending on plastic.

Credit card use
drops sharply again

That decline in credit card balances stems from a general pullback in consumer spending, analysts say. “Over the past three months, nominal consumer spending has been falling at the fastest rate since World War II,” says Sean Maher, an associate economist with Moody’s Economy.com in West Chester, Pa. Maher says that falling gasoline prices have meant less reliance on credit cards at the pump. Based on Moody’s Economy.com estimates, drivers could save well above $100 billion over the course of 2009 if gas remains at $2 a gallon.

Today’s release of the Fed’s monthly G.19 report on consumer credit highlighted that drop in card use. According to the G.19 report, revolving credit — a category of loans made up almost entirely of credit card debt — showed a 7.8 percent decline in December. Previously, the Fed had reported that revolving credit plunged in November 2008 at an annualized rate of 3.4 percent. However, that number was revised sharply lower in the current report to 8.5 percent. The revised November decline was the largest ever recorded in terms of dollar amount and was the steepest percentage fall since January 1978. Overall, revolving debt fell to $963.5 billion from a total of $969.9 billion in November.

Meanwhile, nonrevolving credit fell 0.2 percent in December. That section of the consumer credit report includes a variety of types of lending, primarily auto loans, student loans and loans for mobile homes, boats and trailers. Lending for new cars shows dramatic change: Average interest rates have shot up from 6.4 percent in October to 8.4 percent in December, and the average length of loans fell below 60 months for the first time in years. Both are signs that auto lenders, like credit card issuers, are pulling back on making loans.

Consumers still trillions in debt
Taken as a whole, consumer credit (revolving and nonrevolving) fell 3.1 percent to $2.562 trillion, a decrease from $2.569 trillion in the prior reading. That marked the fourth time in five months that overall consumer credit declined.

Analysts say that poor consumer spending, including a lackluster holiday season, mean consumer credit was held in check. “We didn’t really see a big jump in the spending numbers in December. I don’t think the holiday season is going to be able to single-handedly reverse the trend of falling consumer revolving balances,” Maher says. Others experts agree. “Not spending is a symptom. The disease is unemployment,” says Tony Plath, professor of finance at the University of North Carolina at Charlotte. 

The latest data added to that gloomy picture. According to data released today, unemployment rose to 7.6 percent in January as the U.S. economy lost nearly 600,000 jobs. That brings the total job losses since the recession started in December 2007 to more than 3 million. Meanwhile, the Federal Reserve’s quarterly survey of senior loan officers shows that lenders have become stricter when it comes to extending credit to consumers.  

Not spending is a symptom. The disease is unemployment.

— Tony Plath   
Finance professor   

Experts say the difficult economy is bound to prompt changes in cardholder behavior. “People who have just lost their jobs and don’t have the money are going to start charging,” Plath says. Since consumers may able to rely on their limited savings for the time being, it could take a month or two before they are forced to turn to plastic in order to pay for food, rent and other expenses, he says. “By the time we get to March and April you’re going to see balances go up, by the time we get to June and July you’re going to see delinquencies,” Plath says.  

According to Plath, he nature of the economic slowdown makes credit card delinquencies especially likely. “This is a white collar recession,” he says, noting that many laid-off workers have college educations. They also have homes, children, car payments and credit cards — but not much savings. Combine these factors “and it’s a disaster as far as consumer delinquencies are concerned,” Plath says. 

See related:Federal Reserve survey shows lenders continue to tighten credit standards

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In Research and Statistics

Fed report shows sharp drop in credit card use

Consumers sharply reduced their credit card balances in December, according to monthly data from the Federal Reserve, as borrowers paid for fewer expenses with plastic.

Published: February 6, 2009

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