Consumers are hungry for new credit and are running up more card debt, according to new data from the Federal Reserve. But they’re still paying down other types of debt, such as home and auto loans
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Consumers are hungry for new credit cards and are running up more card debt, according to data from the Federal Reserve. But they’re still paying down other types of debt, such as home and auto loans.
|CARD OWNERSHIP GROWS, BUT STILL DOWN FROM PEAK|
The number of new credit card accounts grew in the fourth quarter of 2011, according to a February 2012 Federal Reserve report. However, as the chart below shows, credit card ownership remains well below its pre-recession record levels.
The Federal Reserve Bank of New York’s quarterly report on household debt and credit, released Monday, showed that consumers opened more credit cards in the last three months of 2011 and charged more of their bills and purchases. However, American cardholders’ card balances, in aggregate, are nowhere near pre-recession levels.
Credit card “offers are getting richer,” says Roy Persson of the market research firm Synovate, giving consumers a bigger incentive to use credit over cash. However, cardholders still “aren’t spending much,” despite the bigger perks.
The New York Fed’s latest report, drawn from consumer credit reports, showed that overall credit is down slightly. That runs counter to other, previous Federal Reserve consumer credit data. The other data, culled from bankers, found that nonrevolving credit — which includes home loans and auto loans — increased substantially in the last three months of the year.
Experts say the Fed’s latest numbers indicate that consumers may be hungry for credit, but they’re still careful with the total amount of debt they’re willing to take on. There are “two parallel effects going on,” says Michael Walden, a professor of economics at North Carolina State University. Households still need to pare down debt leftover from before the recession, “but at the same time, there is some growing optimism [among] consumers which is motivating consumers to spend a little more” than they were before. “The way I read this report is actually positive,” says Walden. “Both of these trends are going” in the right direction.
However, he says, economic growth will likely remain sluggish until more households get their debt under control and feel more comfortable opening their wallets. “Our economy is built on consumer spending and so, literally, how the consumer goes, so goes our economy,” says Walden. It’s important they don’t overspend, he adds, “but we need consumers to spend in order to [help] drive our economy.”
Inside the survey
Every quarter, the Federal Reserve Bank of New York analyzes approximately 40 million consumers’ credit reports and looks at how consumers 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 last six months of 2011 rose by 2.7 percent — up 16.1 percent from the first quarter of 2010 when it hit a record low. This means more consumers applied for credit of all types at the end of 2011.
- Aggregate consumer debt fell by $126 billion, though consumer credit card debt grew to more than $700 billion.
- The number of open credit card accounts rose by 3 million, showing more consumers were successful in their searches for new credit cards. Credit limits also jumped by $98 billion in the last three months of the year.
- Total delinquency rates for all types of household debts fell slightly in the fourth quarter of 2011. But when you only look at credit cards, the percentage of delinquent accounts rose very slightly, showing some consumers are still having a hard time paying their bills.
Consumers’ increased appetite for credit means more people may be brushing off their recession-era skittishness about using credit to pay for goods and services.”Consumers are starting to feel more confident about their own financial situation,” says Keith Leggett, senior economist and vice president for the American Bankers Association. The economy added jobs at a faster clip in the last three months of 2011 and that may have given consumers the assurance they needed to pull out their cards, says Leggett. “Consumer confidence is up and, therefore, we are seeing consumers wade back in” and spend on their cards.
Leggett says the increase in credit inquiries is an especially good sign. “That has been trending up for the last several years, and that’s just another positive signal that consumers are feeling better.”
However, some consumers may also be relying on credit for more than just shopping. Spending was sluggish throughout the end of 2011, according to monthly figures from the Department of Commerce. And data from Bankrate.com’s February 2012 Financial Security Index showed consumers are saving less for emergency expenses.
According to the index, which is designed to gauge how secure Americans feel about their personal finances, a quarter of U.S. consumers have more credit card debt than emergency savings stocked up. So consumers’ bigger balances and increased appetite for credit may mean they are simply reaching for new loans just to get by.
Experts also point out that consumers’ cautious attitude toward credit-fueled spending is unlikely to change any time soon. “Consumers are still being very cautious in how they’re using credit cards, and they aren’t likely to go on a spending binge because they saw what had taken place” during the recession, says Leggett.
“We’ve come through a very tough four-year stretch with regard to the economy, and I just don’t see consumers going out there, full bore, back to what we saw a decade ago when they were spending left and right,” he adds. “Part of that is [their] ability to spend just isn’t there anymore” now that consumers are unable to tap into their homes for extra income.
Lenders sending out fewer offers
Meanwhile, fewer lenders are pounding on consumers’ doorsteps. Despite consumers’ waxing appetite for credit, lenders sent out significantly fewer offers in the last three months of 2011, according to new figures from the market research firm, Synovate.
“We saw mail volumes take an unusual downtick in December” after staying flat in October and sliding slightly in November, says Synovate’s Persson. As a result, total mail volume dropped from 380 million credit card offers to just 224 million by the end of the fourth quarter, meaning consumers hungry for new credit saw fewer offers in their mailboxes.
Persson says issuers’ revenues were cut sharply by new regulations from the Dodd-Frank Wall Street Reform and Consumer Protection Act, so lenders may be more hesitant about taking chances on riskier cardholders. “They have less money to work with and so there may be some strategic planning” going on, says Persson. Plus, it’s expensive to send offers in the mail, he adds.
Banks were also contending with a murky financial outlook toward the end of the year, adds the ABA’s Leggett. “There was a lot of debate at that point in time whether the economy was gaining momentum or not,” says Leggett. “Most of the economic indicators we were seeing were pointing to slowing growth” and “concerns about Europe and the debt crisis there” were causing banks to be more cautious, says Leggett. “But now the incoming economic data is pointing to a brighter economic picture. It doesn’t mean we’re out of the woods or anything, but it means things are not as bad as they used to be.”
Leggett says banks are “cautiously increasing or expanding credit to consumers” and he expects credit card use will spike in the coming months, especially as gas prices continue to rise. Meanwhile, Synovate’s Persson expects cardholders with good credit will continue to see new card offers that encourage them to spend.
Despite fewer offers in the mail, rewards card sign-up bonuses are getting richer as banks try to compete for cardholders with the best credit, says Persson. Banks are also trying to get cardholders to charge more to their new cards, says Persson, and so cardholders with even middling credit scores are seeing tempting 0 APR offers for 12 months or more.
See related: Consumer credit card balances keep rising, Fed says