Fed report shows increase in credit card use
Credit card use unexpectedly rose in September, as cardholders appeared to be increasingly reliant on plastic in the face of economic threats.
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 1.2 increase in September. Previously, the Fed had reported that revolving credit declined in August at an annualized rate of 0.8 percent. However, that number was revised in the current report to an increase of 0.4 percent. Overall, revolving debt went up to a record-high-matching $971.4 billion from a level of $969 billion in August.
|Credit card debt rose in September|
Source: Federal Reserve G.19 report on consumer credit for September 2008
Revolving credit appears to be benefiting from the difficult economy. "Consumers will use credit cards to pay for purchases today when they won't have money available until the next payday," says Elizabeth Rowe, director of banking advisory services with Mercator Advisory Group in Maynard, Mass.
Revolving and overall credit come up
Meanwhile, nonrevolving credit rose 4.4 percent in September. The nonrevolving debt segment of the report includes a variety 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 up 3.2 percent to $2.59 trillion, an increase from $2.58 trillion in the prior reading.
Analysts surprised by Fed data
Although a later revision to the Fed data may find them vindicated, the latest result caught some analysts off guard.
"Banks are pulling back their credit card offers and their credit lines. Also, consumers continue their movement to debit and prepaid cards and cash as they try to budget and monitor every single dime spent as well as protect themselves from high bank overdraft fees," says Rowe.
Data support that argument. A quarterly Fed survey released Nov. 3 showed that nearly 60 percent of banks acknowledged tightening standards on credit card loans, with both prime and nonprime cardholders seeing their credit limits cut. Additionally, almost 65 percent of banks said they had tightened lending standards on other consumer loans over the previous three months. Susan Menke, senior financial services analyst with Mintel International in Chicago, explains that banks look at broad systemic risk factors, such as where a consumer lives, as well as individual risk factors, such as payment behavior, to make lending decisions. "They're pricing for risk," she says. "It's not personal."
Meanwhile, the latest October retail sales reports indicate shoppers have been slow to reach for their wallets, as stores in the United States reported slack sales. Economic numbers continue to suggest why: Data released Friday revealed that the unemployment rate reached a 14-year high in October, as employers cut payrolls for the 10th straight month. More than half of 2008's job losses took place in just the past three months.
With consumers in such a tight spot, they simply can't spend unnecessarily. That spells trouble for an economy that is about two-thirds driven by consumer spending. "It's turning into a consumer driven-recession," Menke says. "People aren't out there buying flat screen TVs. They might have been this summer, but not now."
Auto rates head higher
Elsewhere, the Fed report shows drivers put more money down on their car purchases as auto rates advanced over recent months. Interest rates for new car loans at auto finance companies rose from 3.28 percent in July to 5.11 percent in August to 6.24 percent in September. At the same time, the amount financed declined from an average of $27,582 in July to $26,920 in August to $25,427 in September.
More dismal numbers ahead
Unless something changes for the economy, credit cards should eventually take a hit. "The impact of this is pretty hard to gauge, but its' going to be pretty dramatic and last a pretty long time," Menke says. As for the Fed's data on revolving credit, Menke cautions that the prospects for a further uptick in card use remains bleak. "There's no doubt for the next few months it's going to be in negative territory in terms of growth rate," she says.
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