Consumer credit card debt sees biggest jump in nearly 3 years

Consumer credit card balances saw their biggest percentage jump in nearly three years -- going up more than 5 percent -- according to data released Friday by the Federal Reserve.

Consumer credit card debt jumped by more $3 billion in May -- only the second increase since 2008. The chart below graphs Americans' credit card debt totals from their peak of $973.6 billion in August 2008 through May 2011, when it climbed to $793.1 billion.

Revolving credit, nearly all of which is credit card debt, rose $3 billion to $793 billion, according to the Fed's monthly consumer credit report. The 5.1 percent jump is the biggest since June of 2008.

That's out of character for normally debt-shy borrowers: With the exception of a monthly increase in December 2010, credit card balances have dropped consistently for more than two years. Previous reports had shown that consumer credit card debt had also increased in March 2011 -- by a slight 0.1 percent. However, the Fed revised the number down in this month's report, showing a decrease of 0.5 percent. That makes this month's increase only the second in 33 months.

Some of the increase appears to be the result of banks relaxing their lending approach. "Broadly speaking, we're starting to see a little bit more traction in terms of the issuers trying to go out and get new customers," says Sanjay Sakhrani, an analyst with investment bank Keefe Bruyette & Woods in New York.

Still, since the Fed provides no commentary along with its report, it can be tough to know exactly what factors caused the increase in card debt. And consumer credit data is often revised following its initial release -- as we saw with March's number. That means that May's increase could go higher or lower when the Fed next releases data next month.  

Along with credit card balances, the Fed's monthly G.19 consumer credit report also tracks nonrevolving debt, which includes auto, student, mobile home, boat and trailer loans. Overall consumer credit -- revolving and nonrevolving added together -- rose 2.5 percent to $2.4 trillion in May. It's the eighth straight month that overall consumer debt has increased, the longest such streak since 2008. Meanwhile, nonrevolving debt also rose, jumping 1.3 percent to $1.6 trillion.

This month's report also included information on consumer credit card interest rates. According to the Fed, the average rate on credit cards assessed interest -- in other words, currently held cards that carry a balance from month to month -- fell to 13.10 percent in May from 14.48 percent a year earlier. Analysts say that may be a result of cardholders doing a better job of repaying their card issuers. "The risk profiles of their card portfolios have been gradually improving over the last few years -- that is probably a lot of it," says Susan Menke, behavioral economist for Mintel Comperemedia, which tracks direct marketing offers.  

The drop in annual percentage rates (APRs) on existing accounts that carry balances stands in sharp contrast to what has been happening with interest rates on new credit card offers. According to the Weekly Rate Report, new card APRs are the highest they've been since 2007, at 14.91 percent.

A break from the norm
Eliminating credit card debt, both by borrowing less from banks and repaying what they had already borrowed, had become the norm for consumers. From September 2008 -- when consumer credit card balances hit a peak of $973.6 billion -- to April 2011, revolving debt plunged by more than $180 billion. And the job market continues to give Americans good reason to to be cautious: The latest jobs data showed that unemployment rose to 9.2 percent in June, the highest level since December 2010. When consumers aren't certain they can depend on their next paycheck, it tends to discourage them from borrowing money.

During the recession, lenders pulled back, cutting account holders' existing lines of credit and denying new credit to applicants with poor credit scores. Banks also charged off unpaid debt they assumed would never be repaid. Analysts say those efforts have played a role in cutting revolving debt levels. "The charge-off rates have been very high and that's reducing loans outstanding," says Sakhrani. That's because charging off balances eliminates them from the pool of revolving debt considered by the Fed. 

According to the American Bankers Association trade group, bank card delinquencies (or late payments 30 days or more overdue) increased to 3.40 percent of all accounts in the first quarter of 2011. That's well below the 15-year average of 3.95 percent, but the increase is a sign that consumers are still struggling. "With a slow-growing economy and weak job growth, there will continue to be financial stress that will make it hard for some people to pay their bills on time." ABA Chief Economist James Chessen said in a press release

However, other data paint a rosier picture. Moody's Investors Service says the credit card charge-off rate fell to 6.95 percent in May from 7.16 percent in April, as the delinquency rate declined to 3.30 percent, just shy of the historical low as tracked by Moody's. 

Some experts say the decline in charge offs is helping spur a rebound in card balances. Although revolving debt levels had previously been dropping, "the fact that there's less charge offs helps it go the other way," Sakhrani says.  

More card use ahead?
Additional data show that while May sales at U.S. retailers declined 0.2 percent, when a major slump in auto sales was excluded, retail sales rose 0.3 percent.

As a result, some experts say more gains in card balances are coming.

Moody's says data from credit bureau Equifax indicates that more consumers -- not just those with the best credit scores -- are now being offered credit. Equifax data "suggest that issuers have started going down-market again, although standards are still tighter than they were before the recession," Moody's said in its Credit Card Statement report on June 21.

Other experts agree that overall credit -- revolving and nonrevolving -- will continue their gains. Among them is Michael Niemira, chief economist for the International Council of Shopping Centers.

"The consumer credit cycle really has turned the corner, and I think it will be up in June to continue the upward momentum!," Niemira says in an email.  

See related: Fed says credit cards easier to get, but does anyone want one?

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Updated: 01-19-2019