Balances on credit cards grew again in May, extending April’s record-setting surge, the Federal Reserve said
Revolving debt rose at a 2.5 percent annual pace in May, on top of a 12.3 percent gain in April, according to the Federal Reserve’s preliminary G.19 report on consumer credit. Revolving debt is mainly made up of balances on credit cards. The April increase was the most robust growth rate since 2001.
The average interest rate on credit card accounts was 11.83 percent in May, the Fed report said, the same reading as in February, the last time interest rates were examined in the consumer debt figures. The average rate on accounts that were actually charged interest, because they carried a balance, was 12.73 percent, down from 13.14 percent in February.
Total short-term consumer debt was up by 7.4 percent for May. The total figure includes car loans, student loans and revolving debt, but excludes mortgages. In dollar terms, total consumer debt was $3.19 trillion, of which $872.2 billion was made up of revolving debt.
The growing debt comes amid modest increases in spending and income, other government figures show. Consumer spending increased by $18.3 billion in May, or about 0.2 percent after a revised $2.3 billion increase in April, according to the Commerce Department. Personal income was up 0.4 percent.
While income from wages has barely kept up with inflation, gains in the stock market and home prices are spurring consumer confidence and supporting growth in consumer borrowing, TD Economics economist Thomas Feltmate said. The Dow Jones Average is up nearly 12 percent over the past year, for example. “A lot of people are starting to draw on that equity,” he said.
May’s total consumer credit increase of $19.6 billion was a bit less than analysts’ consensus forecast of $20 billion, Feltmate said. The $1.8 billion addition to credit card balances was dwarfed by increases in student loans, car loans and other consumer debt, marking a return to the trend in most months since the end of the recession. “It’s still showing a good trend,” he said. As consumers take on more debt for items such as autos, “it shows people are willing to take on bigger purchases.”
Card use is changing
A change in how people use cards is happening behind the scenes, altering the makeup of revolving debt, the bank industry says. Increasingly, consumers are using cards for purchases that they pay off the same month, industry figures indicate. That way they rack up rewards or cash back without having to pay interest on a carried balance. Consequently, the overall revolving debt figures increasingly reflect temporary balances that don’t put a burden on household budgets.
“[T]he trend toward the increased use of credit cards for transaction purposes — and not as a credit instrument – seems to be solidifying,” the American Bankers Association said in its Credit Card Market Monitor. The share of people who use cards mainly for transactions increased to 29 percent in the fourth quarter of 2013, the highest mark on record, the association said, while the share of “revolvers” who carry a balance declined slightly.
The move to more transactions comes as the credit card business shifts to rewards cards. Rewards cards make up 161 million active accounts, more than double the 64.3 million nonrewards accounts, the bank industry group said.
Stronger economy emerging
This Fed’s latest look at Americans’ willingness to take on debt comes as economic numbers deliver a mixed message about the health of the consumer economy. A dismal report card for the first quarter of 2014 said the overall economy shrank at a rapid 2.3 percent pace. But since then, other signs have been rosier.
In June, consumer confidence hit its highest point since early 2008, according to The Conference Board, as both the job market and housing market posted gains. Employers created 288,000 jobs in June, bringing unemployment down to 6.1 percent, the Labor Department said.
“Overall, the reasons for improved confidence are not hard to find,” Feltmate said in a research note. “Labor market conditions continue to improve, U.S. equities are sitting at record highs, while the housing sector appears to be back on a more firm footing,”
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