Research and Statistics

Credit card balances keep falling, but pace slows, Fed says


Credit card balances continued their downward spiral in May, according to the latest data from the Federal Reserve, as cardholders remained hesitant to carry any unnecessary debt during the ongoing recession.

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Credit card balances continued their downward spiral in May, according to the latest data from the Federal Reserve, although the size of the drop marked a slowdown from the heated pace of decline in prior months.

Credit card balances fall in May,
but rate of decline slows
Federal Reserve's May 2009 G.19 report

The Fed’s monthly G.19 report on consumer credit, released Wednesday, indicated that revolving credit — a loan category comprised almost entirely of credit card debt — declined at an annualized rate of 3.7 percent in May, coming on the heels of a 11.1 percent fall in April. (Double-digit declines were reported in February and March as well.) Overall, revolving debt fell to $928 billion from a total of $931 billion in April.

The eight consecutive monthly declines in revolving credit from October 2008 to May 2009 represent the longest pullback since the report began in January 1968, according to the Fed.

Meanwhile, nonrevolving credit fell just 0.3 percent in May to $1.592 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.

Taken as a whole, consumer debt totaled $2.520 trillion in May, down a much narrower than expected $3.3 billion from April. Analysts polled by Thomson Reuters had predicted overall consumer credit would plunge by $9.5 billion. Other published reports projected similar declines.

Experts say amid the current economic climate, consumers remain wary of being burdened by debt. As a result, cardholders are reluctant to charge — and are quick to pay down existing balances — causing the total amount of credit card debt to fall. For the approximately 91 percent of households in the United States that are still employed, concern over shouldering debt is “the dominant factor” driving down revolving credit, according to Robert Dye, senior economist with PNC Financial Services.

Higher spending likely still months away

Over the short term, credit card spending appears unlikely to increase, Dye says, as consumers continue to attempt to reduce debt — also known as deleveraging. “We’ve got a lot of mitigating factors and not really a clear path for consumer spending over the next couple months,” Dye says, adding that revolving credit may not recover until August or September. As for identifying those mitigating factors, Dye notes that “consumers are obviously still deleveraging, they are cautious about spending, and credit remains constrained.”

Recent data bear that out. The savings rate climbed to 6.9 percent in May, the highest since December 1993 and a clear indicator of consumer caution. Elsewhere, credit bureau Equifax said the opening of new credit cards accounts declined 37 percent during the first three months of 2009 compared with the year before.

At the same time, the number of late payments has increased. The American Bankers Association announced Tuesday that bank card delinquencies rose to 4.75 percent of all accounts in the first quarter, compared to 4.52 percent in the previous quarter. “The No. 1 driver of delinquencies is job loss,” says ABA Chief Economist James Chessen in the release. “When people lose their jobs, they can’t pay their bills.”

I think we’ll start to see revolving balances stop falling and start rising right about midyear 2009

— Tony Plath
University of North Carolina-Charlotte

With a jobless rate that advanced to 9.5 percent in June — the highest level in more than 25 years — paying bills remains a challenge for many Americans. Unemployment is expected to continue to rise, with Chicago Fed President Charles Evans indicating in a speech on Wednesday that “firms are still reluctant to hire.” Evans noted that the unemployment rate will “likely further increase through the remainder of the year before it flattens out in 2010.” As the growing number of unemployed consumers lose their primary source of income, some experts say the ability to put charges on plastic will become more necessary.

That could change the direction of balances. “I think we’ll start to see revolving balances stop falling and start rising right about midyear 2009,” says Tony Plath, professor of finance at the University of North Carolina at Charlotte, in an e-mail. Plath says delinquencies will then start to rise in late summer, “with delinquent accounts rising more slowly than delinquent balances as stressed borrowers (those with higher average balances on their cards) start to default in larger numbers,” he says.

At the same time, experts say access to credit could become even tougher, following the passage of laws aimed at curbing lending abuses. “The forces that are constraining credit may be growing as credit card companies become more conservative due to pending legislatiion that requires them to be more conservative in their credit allocation,” Dye says.

See related: Obama signs credit card reforms into law

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