Research and Statistics

Consumer credit usage falls in October


Credit card balances shrank in October, as the tightening of credit by banks and limited consumer budgets made it more difficult for cardholders to put charges on their plastic.

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Credit card debt declined in October
October 2008 Federal Reserve G.19 report on consumer credit
Source: Federal Reserve (Click for larger graph)

Credit card balances shrank in October, as the tightening of credit by banks and limited consumer budgets made it more difficult for cardholders to put charges on their plastic.

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 0.2 percent decline in October. Previously, the Fed had reported that revolving credit grew in September at an annualized rate of 1.2 percent. However, that number was revised in the current report to 3.1 percent. Overall, revolving debt declined to $976.1 billion from a level of $976.3 billion in September.

Meanwhile, nonrevolving credit dropped 2.5 percent in October. 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 or trailers.

Taken as a whole, consumer credit (revolving and nonrevolving) went down 1.6 percent to $2.578 trillion, a decrease from $2.581 trillion in the prior reading.

Banks cut back on credit, consumers cut back on purchases

To protect themselves from losses associated with unpaid credit card balances, issuers are limiting consumers’ access to credit. 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.

The market for assets backed by credit cards is drying up — meaning fewer available loans for consumers. “A large decline in the issuance of securities backed by consumer loans in October suggests that this decrease is primarily a result of a decrease in the supply of consumer loans,” says Hamilton College economics professor Ann Owen.

Meanwhile, consumers are also cutting back. According to Robert Dye, senior economist with PNC Financial Services Group in Pittsburgh, Pa., the latest G.19 data on card use is in line with retail sales data. “Consumers are cutting back on any type of discretionary purchase right now,” Dye says, noting that bright spots like results from Wal-Mart actually reinforce that trend. “People are going down market,” Dye says.

Economic news highlights bleak picture

With the U.S. now officially in a recession, and with job losses mounting, consumers are having difficulty making payments on their credit card bills. “The reality is the labor market is going to be tied to people’s ability to pay off these loans,” Owen says, as unemployment and possible wage cuts put a strain on cardholder incomes. Dye agrees, noting that consumers could be building up their cash reserves in case things get worse. “If I knew I was going to lose my job in a month or two, I may not be paying down my credit card balance,” he says.

Unfortunately, the limiting of credit could actually spell more trouble for the economy, Owen says, since it makes consumers less able to spend and therefore cuts into businesses’ bottom lines. “Personal consumption is a key component of gross domestic product, and its recent decline can be attributed not only to increased unemployment, decreased consumer sentiment, but also to the decreased availability of credit,” she says.

Meanwhile, deeper cuts could lie ahead: An analyst with Oppenheimer & Co. earlier this week predicted that the U.S. credit-card industry may pull back more than $2 trillion of lines over the next 18 months, stemming from risk aversion and regulatory changes, meaning available consumer liquidity in the form of credit card lines will be slashed by 45 percent.

Although the careless use of credit produced many of the economy’s current problems, consumer spending will be needed to help stimulate growth once more. “Ironically, increasing credit is really what we need to get out of this situation,” Owen says.

See related:Fed report: Banks tighten lending standards even more, Fed report shows increase in credit card use

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