Credit card balances jump as economic woes deepen

Federal Reserve reports consumer credit use increased in January

Credit card balances rose in January, according to the latest data from the Federal Reserve, as workers saved their incomes and the unemployed were forced to live on plastic.

Consumer credit card balances
reverse downward trend
Federal Reserve's January 2009 G.19 report

The rise in card balances was detailed in today's release of the Federal Reserve's monthly G.19 consumer credit report, which showed revolving credit -- a category of loans made up almost entirely of credit card debt -- showed a 1.2 percent increase in January. Overall, revolving debt grew to $961.3 billion from a total of $960.4 billion in December. Meanwhile, nonrevolving credit grew 0.6 percent in January to $1.6 trillion. 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.

In all, consumers were carrying $2.564 trillion in total debt in January. That's up from a revised December figure of $2.563 trillion.

Much of the increase in credit card balances stems from the rising unemployment rate, which surpassed 8 percent in February. "We're shedding jobs more quickly than we had anticipated 30 days ago. The quicker we shed jobs, the faster we're going to see credit card balances increase," says Tony Plath, professor of finance at the University of North Carolina at Charlotte.

As job losses mount, experts say the unemployed and underemployed -- those who once worked full-time and now work only part-time -- are forced to use plastic. That analysis is reinforced by data indicating when it comes time to pay, consumers are often unable to do so. Research and risk analysis firm Moody's recently reported that credit card delinquencies -- credit card accounts that are more than 30 days past due -- rose to 5.94 percent in January, the highest level since the rate's historical peak of 6.31 percent in January 1992. In the near term, some analysts predict cardholders will struggle even more as the economic challenges continue. "As we get into the midstage of the recession, we're going to see a spike in delinquencies," Plath says.

Increasing delinquencies come at a time when access to credit is already restricted. A Federal Reserve report released last month showed that more than half of lenders tightened credit card lending standards in the final months of 2008.

As we get into the midstage of the recession, we're going to see a spike in delinquencies.

-- Tony Plath    
Finance professor, University of North Carolina-Charlotte    

Plath explains that for the unemployed, it's not a question of swiping their credit card just for the fun of it. With their cash flow cut off, using plastic becomes a necessity. "They've got to buy gas, they've got to buy food," Plath says.

"It's not people looking at the paper going, 'It's a great time to buy a refrigerator,'" Plath says.

'People do have money to spend'
Not everyone agrees that consumers are simply turning to credit as a last resort. The January increase in revolving credit "is probably a temporary blip due to some bargain hunting, and a general feeling of burnout from negative news about the economy," says Susan Menke, senior financial services analyst with Mintel International in Chicago."Even with the bad employment report today, we are still at 92 percent employment -- so people do have money to spend if they choose to," Menke says via e-mail.

Meanwhile, lenders are becoming more cautious. The pullback in credit is something of a mixed blessing to analysts, many of whom say lending had become excessive. "I have always been of the view that over the last 20 years there has been far too much credit available to consumers," says David B. Humphrey, finance professor at Florida State University. Plath says that pullback in credit could continue, impacting not just borrowers with bad credit histories. He says anyone with a FICO score of less than 720 may face lower lines of credit, higher borrowing rates and steeper fees as banks try to make up income amid a shedding of those riskier borrowers.

Other analysts highlight the fact that consumers are putting more money aside, with Dennis Moroney, research director at advisory services firm TowerGroup, pointing to a personal savings rate that climbed to 5 percent in January, the highest level since 1995. It's apparently a case of those that can save, do. "We have a stratified income -- those who are working and those that aren't," Plath says.

For those that aren't working, it's not a pretty picture. "People that are unexpectedly unemployed are going to McDonald's on their credit card," Plath says.

See related: Credit card use drops sharply again in December, Credit card charge-offs hit record high in January, Fed report: Banks continue to tighten lending standards

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Updated: 03-26-2019