Consumer credit card debt keeps dropping

Consumer credit card balances shrank for a record 18th straight month, according to data released Friday by the Federal Reserve.

Federal ReserveThe Fed's monthly G.19 consumer credit report, showed that consumer credit card balances fell 4.5 percent in March, as U.S. consumers erased $3.2 billion in debt. The drop extends a record streak that began in October 2008.

Overall consumer debt grew 1 percent to $2.451 trillion in March. The consumer credit report examines a range of consumer debt, including revolving credit -- a loan category consisting 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.

As the economy continues to rebound, credit card balances kept falling. The revolving debt component fell to $852.6 billion from $855.8 billion in February. U.S. credit card debt stood at $975.7 billion in September 2008, representing a plunge of $123.1 billion up through the latest data. 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 $2,278 in credit card debt during that period, as borrowers either paid down debt or had it charged off as uncollectable.

Friday's report also includes a downward revision of January's revolving debt totals. Previously, those numbers had shown a small increase in consumer debt -- thus snapping the record streak of declines. However, the Fed frequently revises numbers multiple times, and they did just that with January's numbers. The latest revisions show a 6 percent drop in revolving credit occurred in January, meaning that consumers' record run of declining debt is unbroken.

"The consumer credit numbers have shown households have been in a deleveraging mode," as people work to reduce debt levels, says Joseph Lupton, senior economist with JP Morgan Chase in New York.

What's driving debt lower?
But that's not the only cause. Analysts have debated whether it's those consumer efforts or bank write-offs of uncollectable loans that have been primarily responsible for sending debt levels lower. But they aren't necessarily independent, according to some experts. "It's important to recognize that those two are very much related," Lupton says. The New York-based economist points out that some borrowers' efforts to shore up their finances involve abandoning bad debts they -- and in turn the banks -- are happy to leave behind. Of course, doing so can result in damage to those borrowers' credit scores, which can make it tougher to get new loans going forward.

The consumer credit numbers have shown households have been in a deleveraging mode.

-- Joseph Lupton
Sr. economist, JP Morgan Chase

Economic data, however, suggest things are looking up. The latest employment report showed the fastest pace of job growth in four years, even as the unemployment rate rose to 9.9 percent in April. Consumer spending rose in March by the largest amount in five months, although slower-rising incomes forced shoppers to tap into their savings to fund expenses.

Those shoppers may not have had much choice. The Federal Reserve's quarterly survey of senior loan officers showed that credit card issuers again tightened lending standards -- hiking interest rates, slashing credit limits and requiring higher minimum credit scores on new or existing cardholders -- in the first three months of 2010, even as banks made other types of loans more available to borrowers. That means "the limited availability of credit will remain an obstacle for consumers," says Sean Maher, an associate economist with Moody's

The survey also indicated that demand for loans had continued to weaken. However, as the labor market strengthens further and incomes rise, spending on plastic may pick up as consumers make big purchases -- such as refrigerators or dishwashers, for example -- they had put off during the down economy. "Those are all favorable tailwinds to see a return to credit demand," Lupton says.

So just when will steady borrowing resume? "We should start to see a sustained expansion in the next few months," Lupton says.

See related: Credit card lending standards keep tightening, Fed report says, Calculate the cost of just paying the minimum, Calculator: How long until my card balance is paid off?, Credit card rates: interactive graphic on APR changes

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Updated: 01-19-2018