Credit Card Debt Keeps Falling and Americans Aren’t Done with It

Credit Card Debt Keeps Falling and Americans Aren't Done with It

The latest Federal Reserve report on outstanding consumer credit in the U.S. showed a slowdown in borrowing for the month of February. In fact, the aggregate amount of credit card debt in the U.S. fell for a second month in a row, following four consecutive monthly increases (the first time that had happened since the financial crisis began in September 2008). The total was pushed upwards by slower than expected rise in the outstanding non-revolving debt category.

The new data indicate that the growth in credit card borrowing that we saw in the last quarter of 2011 was a blip that was largely attributable to holiday shopping and now we are back to the familiar post-Lehman debt-slashing pattern. That observation is also confirmed by the continuous decline of the credit card delinquency and charge-off rates, which are already at record-lows and keep falling. Moreover, the poor February employment numbers are unlikely to convince consumers that the worst of the crisis is behind us and we can now start spending a bit more freely. So the Great Recession may technically be over, but its aftereffects are very much influencing consumers’ decisions.

Credit Card Debt down 3.3% in February

Credit Card Debt Keeps Falling and Americans Aren't Done with ItThe aggregate amount of outstanding consumer revolving credit, which is made up almost entirely of unpaid credit card balances, fell in February by 3.3 percent, or $2.2 billion, pushing the total down below the $800 billion threshold again, to $798.6 billion. That is only 1.13 percent above the post-Lehman low of $789.6 billion measured in April of last year, which was also the lowest level since October 2004. And it doesn’t seem unlikely that we will break that record sometime in the coming months.

Since the beginning of the financial crisis in September 2008, revolving credit in the U.S. had been falling continually until the end of 2010. However, in 2011 we saw a rise in outstanding credit card debt in half of the Federal Reserve’s monthly reports and in each one of its last four releases for the year. Now, following the consecutive declines in January and February, the total of $798.6 billion is lower by 17.97 percent, or $175 billion, than the $973.6 pre-crisis high.

Overall Consumer Credit Up 4.2%

The non-revolving component of the consumer debt total, comprised of student loans, auto loans and loans for mobile homes, boats and trailers, but excluding home mortgages and loans for other real estate-backed assets, rose in February. The Fed reported a 7.7 percent rise, bringing the total up to $1,723.2 billion, an increase of $11 billion from January. These are much more modest gains than the ones measured for January when we saw the biggest increase in absolute terms since November 2001.

Non-revolving debt didn’t fall nearly as much as the revolving total in the wake of the Lehman’s collapse and resumed its upward trajectory much sooner. And we now know why. According to recently released data from TransUnion, a credit reporting agency, Americans prioritize the payment of their auto loans much more highly than the repayment of their credit card and mortgage obligations (again, mortgages are excluded from the non-revolving category). Americans would not easily give up their cars, nor could they. The non-revolving total fell by 6.4 percent in August 2011, but it has risen in every other month since July 2010. The current total is higher by 6.54 percent, or $105.8 billion, than the pre-Lehman peak of $1,617.4 billion, recorded in July 2008.

The aggregate outstanding consumer credit in the U.S. — the total of revolving and non-revolving debt — rose by 4.2 percent, or $8.7 billion, to $2,521.8 billion in February, its sixth consecutive monthly increase. The new total is still lower by $66.3 billion, or 2.63 percent, than the all-time record of $2,588.1 billion, reached in September 2008, but will soon surpass it.

The Takeaway

At this point, the fall in the outstanding credit card balances really shouldn’t be coming as a surprise to anyone. Auto loans may be at the top of the Americans’ debt repayment hierarchy, but U.S. consumers are still much more intollerant toward credit card debt than at any time in decades.

In addition to the already mentioned record-low charge-off and delinquency levels, the monthly payment rate (MPR) — the rate at which consumers are repaying their outstanding credit card balances — stood at 20.93 percent in February, according to Moody’s. For comparison, historically the MPR has hovered in the mid-teens. So while credit card spending has been rising (which we know from other data), the high MPR has been pushing the outstanding monthly balances lower.

A back-of-the envilope calculation tells us that, if U.S. consumers had stuck to their pre-crisis credit card debt repayment pattern, the outstanding revolving credit in the Fed’s total would have been increasing pretty much in step with the non-revolving one, if not faster. So I see the decrease as a positive development and all the indications are that we will be seeing more of it in the coming months.

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