Credit card balances continued their long decline in November, but analysts say a strong holiday season could soon turn things around.
It’s the 27th straight month that card balances dropped, but experts say it may also be the last — at least for a while.
In November, credit card balances tumbled by 6.3 percent, according to the Federal Reserve’s latest G.19 report on consumer credit. During the two-plus years of declines, the average U.S. household with credit card debt shed $177.1 billion in revolving credit — a category of debt consisting almost entirely of credit card debt. Experts say the still-slumping economy has caused consumers to rein in their use of credit.
“People are still holding debts, but the good news is that they are being more responsible regarding taking on new debt,” says Howard Dvorkin, chief executive of the nonprofit counseling and debt management agency ConsolidatedCredit.org.
Christmas on credit
That pullback in spending may be due, at least in part, to fears of joblessness: Friday’s employment report showed that the unemployment rate fell to 9.4 percent in December as discouraged jobseekers gave up on looking for work. Workers must be actively seeking a job in order to be counted among the unemployed.
But even unemployment concerns may be no match for holiday shopping debt. Athough consumer pessimism had been holding down credit card borrowing, “in December the trend will reverse, with credit card balances rising on the strength of the Christmas shopping season,” says Tony Plath, professor of finance at the University of North Carolina at Charlotte
The Fed agrees that shopping accelerated at year-end. Although the economic recovery continues to prove “insufficient to reduce the rate of unemployment significantly,” as Fed chief Ben Bernanke noted in a speech Friday, consumer spending appears to be picking up. More recently “we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” Bernanke said. “In particular, real consumer spending rose at an annual rate of 2.5 percent in the third quarter of 2010, and the available indicators suggest that it likely expanded at a somewhat faster pace in the fourth quarter.”
Forced to be frugal
So if spending is up, why have credit card balances been falling? That’s because the ongoing decline isn’t entirely the work of cardholders paying down debt. “The credit card industry has also seen a great deal of charge-offs, so that has made it seem as though credit card debt is going down, but in reality it is just being written off by the banks,” Dvorkin says. Write-offs take place when banks abandon hope of ever collecting unpaid debts.
Experts also say consumers’ frugality may be the result of force — rather than choice.
“Many Americans are maxed out on credit cards and have reached their credit limits, or they are close to reaching their limit, and therefore are unable to use their credit as freely as they did in the past,” Dvorkin says.
That argument is supported by the G.19 data, which showed a surge in other types of consumer credit. Overall debt — which includes revolving and nonrevolving debt — edged up 0.7 percent to $2.403 trillion. Nonrevolving debt includes auto loans, student loans and loans for mobile homes, boats and trailers.
Other groups agree that when it comes to frugality, some cardholders have little choice. “We’re seeing many consumers who are close to their credit card limits and are having interest rates increased,” says Susan Seager, a regional budget/credit counseling manager with national counseling agency CredAbility.
“Meanwhile, creditworthy customers (who are fewer in number these days) will maintain ongoing caution with respect to increasing credit card balances in a weak economy, are also contributing to the downturn in credit card balances outstanding,” finance professor Plath says in an e-mail.
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