For the first time since the economic crisis began, consumers’ limits on their credit cards are increasing, according to new data from the Federal Reserve.
A new report from the Federal Reserve Bank of New York showed credit lines increased in the first quarter of 2011, even as cardholders still carefully managed their debt levels. U.S. cardholders’ lines of credit grew to $2 trillion from $1.93 trillion in fourth quarter of 2010, marking the first increase since the third quarter of 2008. However, credit card balances declined, suggesting that although consumers have greater access to credit, they remain cautious about how much debt they put on plastic.
“Banks have started to increase lines of credit, but consumers are still paying down balances and with good reason — many are struggling to keep afloat financially,” says Stephen Brobeck, executive director of the Consumer Federation of America.
|CREDIT CARD LIMITS GROW, |
BUT BALANCES FALL
In the first three months of 2011, consumers’ limits on their credit cards rose for the first time since 2008, according to new Federal Reserve data. At the same time, balances fell. The chart below shows consumers’ credit card limits and balances from the first quarter of 2008 — just before the start of the economic crisis — through the first quarter of 2011.
The Fed’s latest data is further proof of banks’ growing eagerness to lend, a major shift from their tightfisted approach to credit following the economic recession. On May 2, the Fed’s survey of senior loan officers showed that 6 percent of banks increased credit limits in the first quarter, while one in four banks reported greater consumer demand for both higher credit limits and new card loans.
In its report published Monday, the New York Fed acknowledged the change. “We are beginning to see signs of credit markets healing gradually and evidence of greater willingness of consumers to borrow and banks to lend,” Andrew Haughwout, vice president and New York Fed research economist, said in comments accompanying the report.
To compile its data, the New York Fed surveyed Equifax credit reports to create a nationally representative sample of U.S. consumers. According to the New York Fed, its resulting database includes approximately 40 million individuals in each quarter.
For the first quarter, the Fed found:
- Credit limits rose by around $30 billion (1 percent) from the prior quarter. It’s the first increase since the third quarter of 2008, even as credit card balances fell to $700 billion from $730 billion.
- About 29 million more credit card accounts were closed in the first quarter of 2011 than were opened (195 million closed to 166 million opened).
- The number of open credit card accounts on March 31 was down nearly 24 percent from its peak during the second quarter of 2008. Balances on those cards were down nearly 20 percent from highs established in the fourth quarter of 2008.
- Overall consumer debt totaled $11.5 trillion. That’s down about 8 percent from its third-quarter-2008 peak, but up slightly from the end of 2010.
- The percentage of delinquent credit card accounts fell to 13.12 percent from 13.27 percent.
- Total household delinquency rates declined for the fifth consecutive quarter. New foreclosures fell 17.7 percent from the fourth quarter of 2010 and new bankruptcies fell 13.3 percent.
Some experts cheered the improving bankruptcy numbers. “Improving delinquent balances is certainly good news, but the more positive news for me is the improvement in bankruptcy trends. If that trend continues, that will be a very positive sign,” says Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup.
Consumer bankruptcies can be tough to predict, since cardholders that are otherwise current on their payments may catch banks off guard when they suddenly declare bankruptcy — driven perhaps by a medical emergency or job loss. And banks have good reason to be cautious about bankruptcies: Moroney adds that lenders have little hope of ever collecting money from bankrupt consumers.
Such fears about unpaid accounts encouraged banks to cut credit limits and approve fewer card applicants during the economic downturn. But now that the economy is looking healthier — and borrowers are more apt to repay their debts — card issuers are more willing to lend. “I’m fairly certain that the banks, having slashed the lines substantially over the past several years, are increasing them again to promote credit use,” the CFA’s Brobeck says.
Others agree with Fed results
The Fed isn’t the only group reporting that borrowers are more likely to repay their loans. Credit bureau TransUnion said for the first three months of 2011, its credit risk index declined for the fifth consecutive quarter, suggesting that both new and existing borrowers are doing a better job of repaying their debts.
Moody’s Investors Service, meanwhile, predicts that credit card charge-offs — or the amount of uncollectable debt banks will give up recouping — will fall below 4 percent by the end of 2012, marking a 20-year low.
But analysts also say that borrowers are going to open fewer card accounts.
“In less than four years, the percentage of consumers with at least one general purpose, bank-issued credit card has dropped from its peak of nearly 75 percent to just below 66 percent, a level not seen since early 1998, with all indicators pointing to lower levels in the quarters to come,” Chet Wiermanski, global chief scientist at credit bureau TransUnion, said in a press release.