Fed report shows plunge in credit card use

Credit card balances plunged in November 2008 as consumers strongly reined in their borrowing.

According to the Federal Reserve's monthly G.19 report on consumer credit, the revolving credit category -- made up almost exclusively of credit card debt -- saw a 3.4 percent decline in November. That's the largest single-month decrease since April 2004. Previously, the Fed had reported that revolving credit declined in October 2008 at an annualized rate of 0.2 percent. However, that number was revised in the current report to be a flat 0 percent. Overall, revolving debt fell to $973.5 billion. It had been $976.3 billion in October's report on consumer credit.

Meanwhile, nonrevolving credit also fell to 3.9 percent in November. The nonrevolving debt segment of the 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 credit (revolving and nonrevolving) fell 3.7 percent to $2.571 trillion, a decrease from $2.579 trillion in the prior reading. It's the largest percentage drop since 1998, and in dollar terms, the $8 billion decrease is the largest ever recorded. The magnitude of the decline caught many analysts off guard. Economists surveyed by Bloomberg News had anticipated that consumer credit would change only slightly in November.

Retails sales suggest fewer discretionary purchases
Based on the latest data, cardholders appeared to slash their borrowing. That's not unusual in the type of economic climate we're currently experiencing, says Robert Dye, senior economist with PNC Financial Services Group. "Typically in a recessionary cycle, consumers are going to try to deleverage," Dye says.  

That aversion to debt appeared to be bad news for businesses in late 2008: Retailers posted downbeat sales figures for December amid a challenging holiday season, with some stores also cutting their profit forecasts for the current quarter.  

Those factors, combined with reduced lending on part of the banks, cut into credit card balances in November. "It looks like that combination of weak retail sales and typical deleveraging associated with a recession -- and throw tight credit in there -- was a stronger force than households that need to rely on credit due to financial strain," Dye says.

Reports spooked borrowers
Banks tightened credit, and consumers took notice. For example, a Nov. 3 Fed survey of senior loan officers showed that nearly 60 percent of banks had tightened standards on credit card loans, with both prime and nonprime cardholders seeing their credit limits cut over the prior three months.

Exposure to such reports may have also influenced consumer behavior, according to another expert. When it comes to the slump in revolving credit, "I'm not correlating this with retail sales. I'm correlating this with consumer credit," says Susan Menke, senior financial services analyst with Mintel International in Chicago. Menke explains that consumers appear to be responding to news of less accessible credit by reducing their dependence on borrowing. As people use cards less, "Retail sales is going to be a result of that," she says.    

More of the same?
Those weak sales may continue for some time. Minutes released this week from the Federal Reserve's mid-December meeting showed the central bank "revised down sharply its outlook for economic activity in 2009."   

In turn, credit card usage may could also trend lower. "I would not be surprised to see more negative monthly numbers for revolving credit over the next few months," PNC's Dye says.

See related: Fed report: Banks tighten lending standards even more, Consumer credit usage falls in October

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Updated: 03-24-2019