Research and Statistics

Fed report: Consumer credit card balances keep plummeting


Consumers slashed their credit card debt levels by more than $1,600 in 2009, according to the latest Federal Reserve report on consumer credit, and experts say a down economy will continue to leave borrowers with a distaste for debt.

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Consumers slashed their credit card debt levels by nearly $1,700 per household in 2009, according to the Federal Reserve, and experts say a down economy will continue to leave borrowers with a distaste for debt.

Americans spent 2009 eliminating credit card debt. At the end of 2008, Americans held $957.3 billion in credit card debt. At the end of 2009, that number fell to $866 billion — a total decrease in debt of more than $91 billion. The graph below tracks consumers’ shedding of debt in 2009.

Note: Dollar totals shown in billions.

A look at 2009 from the Federal Reserve's report on consumer credit

According to the Fed’s monthly G.19 consumer credit report released Friday, credit card balances fell sharply again in December. Americans shed $8.5 billion in debt, marking a record 15th straight month of decline. The report considers various types 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. Overall, revolving debt fell to $866 billion from a revised total of $874.5 billion in November.

Americans’ credit card debt stood at $975.2 billion in September 2008. The 15 monthly declines since then have seen U.S. cardholders eliminate $109.2 billion in credit card debt. That means the average U.S. household with credit card debt — of which there are roughly 54 million, according to government data — has eliminated roughly $2,022 in credit card debt during that period.

In 2009 alone, Americans shed $91.3 billion in debt — $1,691 per household with credit card debt. Experts say those lower debt levels stem from consumers’ reaction to the ongoing economic slump.

“People are doing a combination of things — they’re saving, they’re paying down debt and they’re not shopping,” says Dennis Moroney, research director with advisory services firm TowerGroup.

Shoppers shy away from credit, increase savings
Taken as a whole, consumer debt fell by less than 1 percent to $2.46 trillion in December — a record 11th straight monthly drop, dating back to February.

Even a solid Christmas shopping season wasn’t enough to fully offset consumers’ distaste for debt. Data from the U.S. Commerce Department showed that total retail sales fell 0.3 percent in December following November’s 1.8 percent increase. At the same time, consumers are putting money aside, with the personal savings rate — a percentage of disposable personal income — increasing to 4.8 percent in December. “The savings rate continues to go up, so consumers continue to squirrel away,” Moroney says.

Meanwhile, a fourth-quarter earnings announcement from MasterCard showed that U.S. credit card use fell 13 percent from the year before, as MasterCard branded debit card use climbed 10.5 percent. “People have been utilizing credit, obviously, to a much less extent,” MasterCard Chief Financial Officer Martina Hund-Mejean told the Associated Press.

Fear encourages frugality
But why? Experts say the recent economic challenges have resulted in a sort of “scared straight” program for borrowers. “People are realizing that they can only spend money that they have,” says Lauren Weber, author of “In Cheap We Trust.”

In December, Americans’ credit card debt fell by more than 11 percent, continuing recent trends. The chart below shows the percentage change in credit card debt since the fourth quarter of 2008 — including a 13 percent drop in the final three months of 2009.

Federal Reserve's report on consumer credit

According to Weber, a look back at U.S. history shows periods alternately characterized by widespread spending and saving. “For the vast majority of Americans, frugality is the result of necessity rather than choice. I think that’s what we’re seeing now,” she says, pointing to the lack of choice consumers have about whether or not they lose access to credit — or jobs.

Weber says cycles of thrift are often the result of fear. In the current environment, it’s tough to find a scarier boogeyman than the threat of unemployment. According to the latest government data, although the U.S. unemployment rate unexpectedly fell to 9.7 percent in January, employers nevertheless cut an additional 20,000 net jobs over the month.

Looking ahead
After slashing so much debt in 2009, experts say cardholders will continue to avoid using plastic — for a  time. “I suspect the G.19 number will continue to deteriorate as consumers pay down debt,” says Moroney. “We don’t see that getting better into late 2011.”

Of course, whether consumers continue to save their money and pay down debt largely depends on how the economy behaves over the coming months. January data showed consumer confidence reached the highest level in more than a year, and experts say sustained improvement in the labor market could result in a rebound in spending. Additionally, as large appliances like dishwashers inevitably break, consumers will again turn to credit. “There is this pent-up demand. Eventually people will have to start buying stuff,” Moroney says. “You can’t use debit cards for big purchases, you have to finance stuff.”

Weber, meanwhile, says that consumers won’t have much trouble returning to their shopaholic ways. “History suggests that these tend to be temporary periods and that we eagerly return to the idea of having a better life and spending on luxury,” she says.

“Once the economy starts growing again in a sustainable way and incomes start rising, I feel confident we’ll go back to the days of Saks advertising $4,000 Gucci dresses again.”

See related:A guide to the Credit CARD Act of 2009, Lending standards show signs of easing

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