Research and Statistics

Fed report: Credit card balances plummet by nearly $14 billion


Americans dumped a record $14 billion in credit card debt in November, according to Federal Reserve data, and experts say the debt shedding won’t end anytime soon.

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Americans dumped a record $14 billion in credit card debt in November, according to Federal Reserve data, and experts say the debt shedding won’t end anytime soon.

Americans’ credit card debt has fallen by more than $101 billion from its September 2008 total of $975.2 billion — including a record drop of $14 billion in November. The chart below shows how steadily consumers have pecked away at that debt — or had it charged off — during a record run of 14 straight monthly declines in credit card balances. That’s an average of $1,874 eliminated per household with credit card debt.

Note: Decrease shown in billions.

According to the latest Federal Reserve data released Friday, credit card balances saw their biggest dollar-value drop since records began in 1968 and the largest percentage drop (18.5 percent) since December 1974. It also marked a record 14th straight month of decline. The data, contained in the Fed’s monthly G.19 report, looks at various components of consumer debt, including revolving credit — a loan category comprised 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. Overall, revolving debt fell to $874 billion from a revised total of $887.7 billion in October.

Americans’ credit card debt stood at $975.2 billion in September 2008. The 14 monthly declines since then have seen U.S. cardholders eliminate $101.2 billion in credit card debt. 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 $1,874 in credit card debt during that period. Experts say those lower debt levels can be attributed to the impact the troubled economy is having on both borrowers and banks.

“You’ve got high unemployment, you have a lot of people who might have used revolving credit who have fallen out of access to revolving credit, and you have this dark foreboding where people are concerned about spending money they don’t have,” says Elizabeth Rowe, director of banking advisory services with Mercator Advisory Group in Maynard, Mass.

Borrowers and banks drive debt levels lower
Taken as a whole, consumer debt fell more than $17 billion to $2.464 trillion in November — a record 10th straight monthly drop, dating back to February.

Some analysts say that falling debt levels — “deleveraging,” in economist-speak — are the result of activity by both cardholders and their lenders. “Obviously, deleveraging occurs by paying down debt, but more so by write-offs,” says Michael Kon, a senior analyst with global investment research firm Morningstar. Write-offs (sometimes also called charge-offs) occur when banks decide they are unable to collect unpaid debts from delinquent borrowers.

These days, banks are finding it more and more difficult to collect on those debts. Based on the latest data from Fitch Ratings, late credit card payments reached record levels in December of last year, as charge-offs also climbed higher. Fitch says that the challenging labor market continues to present problems for borrowers, with charge-offs set to retest their recent highs during the first half of this year.

When will Americans’ record shedding of credit card debt reverse itself? We went back in history to look at past recessions for clues and, well, found few answers. Click on the chart below to see how credit card debt has behaved in recessions since 1968.

Credit card debt in a recession

While banks are suffering, consumers are becoming more cautious. Cardholders who may have previously considered swiping their plastic recklessly are becoming more careful about spending. “The decline in balances shows that consumers are deleveraging by borrowing less from credit card companies to fund their shopping,” Kon says. According to Rowe, the economic challenges have prompted a shift in consumers’ attitudes, leaving them less optimistic about their ability to charge a purchase today and pay it back tomorrow. “It’s a very dark pessimism people feel about their ability to plan ahead,” she says.

That change has been reflected by recent data, including numbers from the 2009 holiday season: Although data from Thomson Reuters showed that retail sales increased 2.9 percent in December, the Los Angeles Times reports that Christmas shopping was still down from pre-recession levels.

Other analysts agree that cardholders have changed their habits. “Consumers are working hard to get their financial houses in order by spending less, saving more and paying down debt. But there’s still a bumpy road ahead with many people unemployed and family budgets stretched to their limits,” James Chessen, chief economist for the American Bankers Association, said in an ABA press release.

Jobs data released Friday, which showed unemployment remained at 10 percent in December, support that outlook. The uncertain employment picture means that with job loss an ongoing threat, consumers are not only being careful about shopping, but they’re also worried about paying their bills.

An improvement on the horizon?
Against that backdrop, analysts say that credit card balances are unlikely to tick higher in the near term. “The consumer switched modes from spending to saving and the CARD Act makes access to credit more difficult, so I don’t see them rebounding any time soon,” Kon says.

Other experts say that an eventual rise in revolving credit will not initially stem from a recovery in consumer spending, but rather by an increase in the number of those consumers overall.

That’s because over time, as people slow their efforts to pay off debt, population growth will increase the number of U.S. cardholders. “At some point, as the economy begins to turn around, that growing number of households begins to be reflected in the consumer credit outstanding,” Rowe says.

In other words, it will be growth in the United States population — rather than growth in the economy — that drives revolving credit upward. “That number may push up, but it’s not going to be a harbinger of the good time rolling again,” Rowe says.

See related:A guide to the Credit CARD Act of 2009, Banks continue to tighten credit card lending standards, Fed report says

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