Consumers are cooling on credit, N.Y. Fed Report says

Fewer consumers applied for credit in the first quarter of 2012, while many remained shy about piling on debt, according to data released Thursday by the Federal Reserve Bank of New York.

The bank's quarterly report on household debt and credit, released May 31, showed that the number of open credit card accounts remained flat in the first three months of 2012, while the balances on those cards declined.  

The study's findings fall in line with previous Federal Reserve consumer credit data. Over the short term, the data show credit card debt tumbled in the first two months of the year after rising significantly during the holidays.  Over the long term (see chart below) it shows that the number of credit card accounts, more than any other account type in consumer lending, plummeted during the recession.

Experts say the past six months of rising and then falling debt show that consumers are willing to borrow for a temporary event, such as Christmas, but they still aren't willing to let debt linger the way they did before the credit crisis. "I think there is still caution on the part of consumers," says Paul Edelstein, director of financial economics at IHS Global Insight. "They don't want to pile up debt quarter to quarter, but they will on a shorter-term basis."

The New York Fed's latest report, drawn from consumer credit reports, found that total consumer debt fell by about $100 billion in the first quarter of the year. However, student loan debt rose significantly -- by a whopping $30 billion -- while auto loans rose by about $1 billion.

"Student loan debt continues to grow even as consumers reduce mortgage debt and credit card balances," said Donghoon Lee, senior economist at the New York Fed in a statement. "It remains the only form of consumer debt to substantially increase since the peak of household debt in late 2008."  

Inside the survey
Every quarter, the Federal Reserve Bank of New York analyzes approximately 40 million consumer credit reports and looks at how they are using credit.

Some of the highlights of this quarter's report include:

  • The number of credit account inquiries (credit checks by banks) in the first three months of 2012 declined slightly, by just half a percent. However, the number of consumers applying for credit of all types, include home and auto loans, is still up by around 15.5 percent compared to the first quarter of 2010 when it hit a record low.
  • Aggregate consumer debt fell by approximately $100 billion, while consumer credit card debt dropped by more than $21 billion.
  • The number of open credit card accounts stayed put at 383 million, after rising by about 3 million the previous quarter.
  • Credit card limits fell by less than half a percent after jumping by about 3.6 percent at the end of 2011.
  • A larger number of consumers paid their bills on time, with the total number of delinquencies on all types of debt continuing to fall. That includes late payments on credit cards, which fell by nearly $3 billion in the first quarter of the year. However, the amount of student loan balances in default spiked by nearly $2 billion during the same period.

Experts say this year's slow growth in borrowing can be partially explained by the fact that many people's personal balance sheets still aren't improving as much as they hoped. "Consumers are used to a different kind of recovery," says Tony Plath, a professor of finance at the University of North Carolina at Charlotte.

In past economic downturns, the nation bounced back much faster and people's prospects improved substantially. However, this time around, the unemployment figures are falling, but at an agonizingly slow pace, and people's incomes aren't rising enough to keep up with higher food and gas prices.

"The trajectory associated with the recovery has been so flat, consumers again are getting a little disheartened when they realize that the rate that we're recovering is so frustratingly slow," says Plath.  

Consumers are used to a different kind of recovery.

-- Tony Plath
University of North Carolina-Charlotte

That's not all that is at play, he says. "The trend that's most troubling is personal incomes aren't growing," says Plath. As a result, people have less money to spend overall and they can't afford to take on debt they won't be able to pay back.  "If your income is constant, but you're spending more on gas and food every week, the difference has to come out of somewhere and it's coming out of the household budget," he says. "Down the road, that's dangerous because essentially you don't have the income to service the debt."  

Meanwhile, banks are making it somewhat easier for consumers to access credit, according to previous Federal Reserve data. However, the changes have been slight, say experts.

"It's good to know that banks feel a little more confident," says IHS Global Insight's Paul Edelstein. However, "these aren't leaps and bounds, these changes in standards." It's a little easier to get a credit card than it was a year ago. However, "in absolute terms, standards are still fairly tight," says Edelstein.

Consumers are also unlikely to ever be able to get credit as easily as they did before the crisis, he says. "And that's probably a good thing," adds Edelstein.

Federal Reserve data released Thursday shows that credit card accounts haven't bounced back after their precipitous fall in the recession.

Credit card lending is relatively flat now after a precipitous drop during the recession, caused by lenders slamming on the brakes on issuing cards, consumers losing their cards after being unable to pay their bills, and others pulling back on spending. Source: Federal Reserve Bank of New York.

See related: Consumers hungry for new credit cards, N.Y. Fed says, Consumer credit card balances shoot up

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Updated: 03-19-2019