It’s that time of the month again. No, not that time of the month, but the one that gives your (male) blogger pain, tension and stress. You know, the one when the Federal Reserve releases its consumer debt statistics.

Credit card debt declines again… maybe

Identifying the emerging credit card debt trends contained in these is so fiendishly difficult that it’s almost enough to make you feel sorry for professional economists. On Friday, the Fed published the figures for August, and these showed that during that month “revolving credit,” which is nearly all credit card debt, fell for the second month in a row. This time the drop was $2.2 billion, or 3.4 percent, a smaller reduction than in July when the decrease was 5.4 percent. In the second quarter, revolving credit actually rose, though only by 1.5 percent.

All those figures are seasonally adjusted. Check out the Fed’s unadjusted data, and you’ll find a different story over recent months:

• Apr: $778.7 billion
• May: $781.4 billion
• Jun: $787.3 billion
• Jul: $788.8 billion
• Aug: $792.6 billion

The Fed’s website isn’t especially forthcoming about how seasonal adjustments are calculated, but some may think that the raw data–especially at a time when so many other factors are in play–is at least as interesting as the adjusted.

Credit card companies lending more?

One of the problems with the Fed’s figures is that they only measure the amount of money people owe credit card companies at a given moment. And that can decline for either of two reasons:

1. Responsible cardholders paying down their balances
2. Credit card companies writing off (”charging off” in industry jargon) debt, and passing it to collection agencies

As has been discussed previously on IndexCreditCards.com (most recently in Lies, damned lies, and credit card debt statistics), taking that last factor out of the equation can make a big difference, and it may well be that actual card debt is rising more quickly than the Fed’s data suggest. Indeed, DailyFinance last month ran a story under the headline, “Credit Card Debt Soars as Americans Borrow Like It’s 2006.”

Credit card interest rates a worry

Some would view higher levels of debt acquisition as worrying even if times were good and borrowing cheap. But, today, the economic outlook is uncertain, to say the least, and credit card interest rates are exceptionally high. At the time of writing, this site’s credit card rate monitor puts their average annual percentage rates at:

• Rewards credit cards: 17.63 percent
• Non-rewards credit cards: 14.88 percent

Credit card debt in context

It seems unlikely that card debt is going to turn into a credit bubble anytime soon. And the economic recovery, such as it is, could be killed stone dead if everyone suddenly stopped borrowing at once. So on a macro level, a mini-borrowing boom might not be a bad thing.

But on a micro level, when it comes to individuals and their families, unmanageable credit card debt can quickly turn into a nightmare. So, if you have any, you might be well advised to reduce it as much as you can, as quickly as you can. After all, few us us know what our employment and financial futures might hold.

Back in July, IndexCreditCards.com published a news blog that reported on the remarkable recovery in credit card companies’ fortunes. It said that, after many quarters of painful losses, they were again generating serious revenues and healthy profits.

Credit card companies still doing well

It looks as if that situation hasn’t changed. Yesterday, Discover Financial Services published its third-quarter results, and Bloomberg reported that they beat by a significant margin the average of analysts’ expectations. Net income was $649 million that quarter, up from $261 million during the same period in 2010.

There seem to be two main reasons for this:

1. The volume of credit card sales jumped 9 percent compared to the same quarter last year, and reached an all-time high of $26.3 billion.
2. Provision for bad credit card debt fell precipitously over the same period: to $100 million, down from $713 million.

It has to be said that Discover frequently outperforms many of its competitors, but there’s little reason to expect other credit card companies not to follow this general trend.

Credit card debt worrying

The fact that Discover expects so much less bad credit card debt in the short term is great. But there does seem to be a real question mark over how long that happy situation is going to last.

Also yesterday, CNN Money reported on research that predicts that Americans could add roughly $54 billion to their revolving credit card balances during 2011. In the second quarter alone, according to the report, they added $18.4 billion, 66 percent more than they did during the same period last year, and 368 percent more than in the second quarter of 2009.

Increases in bad debt tend to lag behind increases in actual debt, because most people keep up payments, at least for a while. But with the economy looking increasingly shaky (right now, you need a strong stomach to check the Dow) this could be a bad time for consumers to be adding to their financial burdens.

In August, the average “charge-off” (when credit card companies write off bad debt and pass it to collection agencies) rate for Bank of America, Capital One, Chase, Citi and Discover inched up to 5.17 percent from 5.15 percent in July. It was the first time in a year that there’d been a rise.

Credit card rates another factor

At the time of writing, the IndexCreditCards.com credit card rate monitor says that the average interest rate across all cards is 16.3 percent, which is exceptionally high. Indeed, iStockAnalyst said earlier this week that current credit card rates are at their highest for a decade.

That adds to the danger of rising card debt because high rates make it make it more likely that families and individuals unwittingly blunder into a downward spiral in which ever-increasing proportions of their disposable income are eaten up by interest payments. Should the growing threat of a double-dip recession be realized, then that problem could be compounded, and card issuers may well find bad debt again undermining their profitability.

Let’s hope that the people in credit card companies who make lending decisions are smart enough to recognize that. But if you’ve read Credit card lending: bring on the tripping goldfish, you may not be optimistic.

It’s not easy being an economist.

There. It’s been said. Like sane people everywhere, your blogger used to point and laugh when he saw an economist in the street, throw soft furnishings at the screen when one appeared on television, and ensure that the first words out of his mouth on shaking hands with one were: “So how come you didn’t see the credit crunch coming?”

Credit card debt trends crazy

But all that changed when the Federal Reserve published its consumer credit statistical release for July. For years now, this blogger has been trying to make sense of these regular releases, and recent months seemed to indicate the emergence of a definite trend. Here’s how his IndexCreditCards.com news blog described it back in July:

“…there is an undeniable trend (albeit an inconsistent one) that shows that consumers are slowing their paying down of credit card debt. The Fed’s data reveal this in terms of annualized rates of change in revolving credit:

• 2009: -9.6 percent
• Q1 2010: -11.9 percent
• Q2 2010: -6.6 percent
• Q3 2010: -9.4 percent
• Q4 2010: -3.1 percent
• Q1 2011: -5.0 percent
• April 2011: -1.3 percent
• May 2011: +5.1 percent”

That May figure was later revised down to +4.6 percent, and June’s (reported in a presciently titled blog, Credit card debt on rising trend) came in at +3.9 percent. But the latest number for July was, um, -5.2 percent. Yep, that month American consumers gained traction, paying down their card debt by $3.4 billion and leaving the total at $792.5 billion.

Credit card use varies

Opinion appears to be split over whether July’s figure is a reversion to the old trend of Americans paying down their credit cards, or a mere statistical blip. Of course, nobody knows for sure, but there are signs that the latter may be the more likely.

The First Data SpendTrend® is a different measure of credit card activity from the Fed’s. It reports the number of credit card transactions each month, and their dollar value, but doesn’t look at debt. It found that, in July, year-over-year credit card transaction growth was a fairly modest +5.3 percent, and dollar growth over the same period was +7.4 percent.

However, in August, the same figures were +11.7 percent and +12.4 percent respectively. So credit card use regained strength last month.

Credit card interest rates an issue?

Of course, it could be that consumers are using their credit cards for reasons other than credit utilization, and that card debt will be seen to have fallen again when the Fed publishes its August data next month. Certainly that would be understandable given that credit card interest rates are creeping up. The average across all cards has risen to 16.53 percent at the time of writing, according to the IndexCreditCards.com credit card rates monitor.

Moreover, when they’re asked about their plans, many consumers claim that the financial crisis has forced them to change fundamentally their attitude to debt. Absolute Strategy Research last week unveiled a July survey in which 67 percent of respondents said that was the case. Roughly one-third said that they would reduce their total debt over the following 12 months, and a similar number said they wouldn’t increase it during that time.

However, what people tell researchers and what they actually do are often two completely different things. And if your blogger were a betting man he’d wager as much as a whole dime on next month’s Fed figures showing a small rise. But what does he know? He’s not even an economist.

As people up and down the eastern seaboard continue to clear up in the wake of Hurricane Irene, many are likely to be looking to their credit cards to help pay for repairs and the replacement of wrecked household goods. It’s depressing work, and especially distressing for those who are uninsured, either completely or just for flood damage. Business Insider recently quoted one source that suggested that up to 95 percent of all affected homeowners fall into this group.

Low interest credit cards versus rewards credit cards

Wow! That’s a colossal and genuinely shocking figure. And it suggests that huge numbers of victims may be forced to fall back on their plastic just to restore their lives to something approaching normalcy.

If you’re one of them, you’re likely to be pretty short on silver linings at the moment, and might be attracted by even the minor one offered by rewards credit cards. While you’re spending all that money, you may think, you might just as well get some cash back, travel miles, points or whatever.

Good idea. But it may not be the smartest move for all your purchases. For many of those, you should probably be pulling your low interest credit cards from your wallet instead.

Credit card rates, rewards credit cards and credit card calculators

That’s because, on average, interest rates are higher for rewards credit cards than those for ordinary ones. Indeed, at the time of writing, IndexCreditCard.com’s credit card rates monitor says that the average annual percentage rate (APR) for consumer non-rewards cards is 14.72 percent, while that for consumer rewards cards is 17.30 percent.

You’d need a spectacularly generous rewards card for it to make sense for you to charge items to it that you know you won’t be able to pay down for a long time. Generally speaking, the rule is that it’s good to use rewards credit cards for purchases that you know you can clear quickly, and low interest credit cards for those that are going to take you longer.

You can use credit card calculators to see how long it should take you–and how much it should cost you–to pay down balances at your own cards’ different interest rates. Then you can work out what your personal strategy should be.

Balance transfer credit cards

If your credit’s good and you’re having to load your cards a lot post-Irene, then you might want to consider applying for a balance transfer credit card. There are two reasons why this could be a good idea:

1. A number of these–mostly from Citi–offer zero percent APR on transferred balances for 21 months. Others make a similar offer for 15 months. That could provide you with just the breather that you need to get over the hurricane.
2. Your credit score could suffer if the balance on any of your cards is higher than 30 percent of its credit limit. So even if you can manage paying down your credit card debt easily, you could be better off spreading the load across more plastic.

Credit card companies human!

One tiny positive revelation that emerged in the aftermath of Irene is that credit card companies are human. That’s not necessarily in the sense that the U.S. Supreme Court thinks, namely that corporations are people. No, it’s in the sense that they’re run by real-life, breathing and occasionally sentient human beings. Many of them announced that those affected by the hurricane could see their late payment and/or other penalty fees waived, though only for a strictly limited time. Awww. Ain’t they sweet?

Every day, it seems, there’s alternatively good credit card news or bad credit card news. Cheer up: today’s is good. Because the number of people who’ve fallen behind 90 days or more past due on their card accounts has dropped to its lowest since 1994. And that, for the numerically challenged, was 17 years ago.

The data, published Tuesday, come from TransUnion, one of the big-three credit bureaus, and are part of a continuing study. They relate to the second quarter of this year.

Manageable credit card debt

A closer look at the figures show that the delinquency rate has fallen to 0.60 percent, down 18.92 percent from the previous quarter, when it stood at 0.74 percent. Taken over the last year, the drop is even more dramatic. In the second quarter of 2010, the same number was 0.92 percent, which makes the reduction over 12 months a whopping 34.78 percent.

It’s important to see these rather dry figures in context. Very roughly speaking (and in terms that could make a statistician climb the walls), the figures suggest that about one-third fewer individuals and families were facing the misery of unmanageable credit card debt in the second quarter of this year than were doing so last. Now that is good news.

Problem credit cards by state

Of course, these are national numbers, and the picture varies from state to state. Nevada continues to be the worst affected by credit card delinquencies with a rate of 0.93 percent, followed by Georgia (0.78 percent), Florida (0.77 percent) and Mississippi (0.75 percent). At the other end of the scale, Alaska had the lowest rate at just 0.39 percent.

Credit card debt in the future

Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, commented on the nationwide situation in a statement:

National credit card delinquency rates have fallen to levels not seen since 1994 as consumers continue to tighten their spending. TransUnion believes that the recovering economy is only indirectly impacting delinquency rates. More important and impactful to the decline in bank card delinquency are that consumers are using credit cards more responsibly; a large number of delinquent accounts have moved to charge-off status; and lenders remain conservative in their underwriting.

Becker’s last three factors have all applied for the last 30 months or so. But there are signs that they’re all slowing down or reversing. For example, TransUnion’s own figures show that the average credit card debt per borrower crept up to $4,699 in the second quarter. That was only a $20 rise, but it follows earlier significant falls, and suggests–as do the Federal Reserve’s consumer credit data–that many Americans are very quickly becoming more relaxed about taking on additional credit card debt.

So, if you do, you may be right to have a nagging doubt in the back of your mind. The economy is yet to leave intensive care, opinion’s divided over the risk of a double-dip recession, and credit card rates are high. Could this good news–welcome though it is–about delinquency rates be short-lived, and will it be bad news tomorrow?

You’re not expected to be sympathetic, but your blogger has a tough job at the moment. One of the most important stories swirling around the credit card industry right now concerns debt, and that’s not a straightforward topic.

On the one hand, the truly scary financial turmoil that followed Europe’s sovereign debt crisis and Standard and Poor’s downgrading of America’s credit rating has made any responsible personal finance blogger warn readers against maintaining or building credit card debt. Over the last few days, IndexCreditCards.com urged such caution in When the sky is falling, pay down credit card debt and Ashton Kutcher’s wise words on credit card use.

On the other hand, it’s widely acknowledged that some increase in credit card debt may well be a precursor to the current feeble economic recovery finally gaining real traction. Some economists estimate that 60 – 70 percent of U.S. economic activity depends on consumer spending, and it’s hard to see that returning to normal without some rise in credit usage.

Credit card trends reversing

So you can read as either good or bad news the Federal Reserve’s latest figures on consumer credit, which were released (almost invisibly because of rather more pressing economic headlines) on Friday. They cover June, and reveal that in that month revolving credit, which very nearly entirely comprises credit card debt, rose by $5.2 billion. Convert that to a percentage change at an annual rate, and you’re looking at +7.9 percent.

Back on July 11, this blog (Credit card debt makes a rare uptick) talked about the sharp reversal in credit card trends that rising revolving credit represents. In February this year card debt hit a recent low of $791.0 billion, which was a considerable achievement given that its high of $957.5 billion occurred as recently as 2008. June’s figure, of $798.3 billion, was a result of more than two years of falls, punctuated by only three increases, in December 2010, May 2011 and June 2011.

Credit card defaults on the decline

Yesterday, Fitch Ratings released data that showed that responsible credit card use is continuing to be less of a challenge for consumers. In a press release, Fitch noted that in May:

Credit card defaults registered the second largest monthly decline since the passage of the Bankruptcy Reform Act in 2005 and are now back in line with historical averages. In addition, both prime card monthly payment rate (MPR) and late stage delinquencies improved…

In other words, people are managing their credit cards better than they have at any time since well before the credit crunch.

Credit card rates less likely to rise

Yesterday, the Fed announced that it would keep its interest rates low for at least another two years. That doesn’t necessarily mean that credit card rates won’t go up at all, but it is likely to moderate any increase. So does that mean that it’s okay to go ahead and charge more to your cards?

Well, maybe it’s safer than it seemed earlier in the week. But more prudent readers might think that that the best policy would be to keep their own credit card debt low while hoping that others boost the recovery by increasing theirs.

Ashton Kutcher, star of “Two and a Half Men” and a number of movies, sang at yesterday’s Teen Choice Awards ceremony, where he picked up a mantelpiece ornament for his performance in “No Strings Attached.” And, somewhat unexpectedly, he also offered some sage advice to his young audience.

“Here’s the best piece of advice I got when I was a teenager,” Kutcher said. “Don’t ever charge anything on a credit card if you don’t already have the money in the bank to pay for it.”

Gather.com, a news blog, reports that Kutcher followed up his remark in a tweet: “Thank you all for the award and the love! And I’m serious about thy [sic] credit card thing. #tca.”

Credit card debt and the young

Kutcher is married to Demi Moore, and it seems likely that between the two of them they have money in the bank to pay for pretty much anything that they feel like charging to their credit cards. And he must be aware that a multimillionaire preaching to the less fortunate about financial responsibility could be taken as “let them eat cake.” But that just makes his statement more brave. Because his was a message that needed saying.

Some weeks ago, IndexCreditCards.com explored (see “I owe, therefore I am” say many young adults) the shocking results of a serious academic study that found “a significant number of young adults–and especially those who came from poorer backgrounds–reported that the higher the amount they owed in education and credit card debt, the better they felt about themselves.”

Credit card regulation and rates

However, it’s not just Kutcher’s teenage audience who could benefit from following his advice. On Friday morning, this blog warned of the new dangers faced by everyone who has serious credit card debt (When the sky is falling, pay down credit card debt).

At the time, the biggest threat appeared to be from falling markets, which might have triggered–and still might trigger–the second phase of a double-dip recession.

Later that day, Standard & Poor’s downgraded America’s credit rating, a move that not only could make that threat greater, but that also could bring about a rapid rise in credit card rates. Yesterday’s Washington Post put it this way:

The interest rate the United States pays on its short-term loans is determined by the market for Treasury bills. The downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money. Many consumer loans, such as credit cards and mortgages, are linked to the yield on Treasuries and therefore would also rise.

The good news is that credit card regulation, in the form of the Credit CARD Act of 2009, prevents card issuers from increasing rates on existing balances except in rare circumstances, and new rates should generally apply only to new purchases.

Keep credit card use in check

However, you’d be brave–borderline foolish–to see this as an opportunity to make purchases now in an attempt to lock in low credit card rates. Yesterday’s New York Times warned:

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around. Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession… with most major measures of economic health… worse today than they were back then.

And that means that you might find yourself either struggling to keep up payments on your plastic, or in desperate need of as long a line of credit as you can get. Either way, you could regret ignoring Kutcher’s advice.

First, a warning: your blogger isn’t an economist. Given the recent track record of those who are, you may well regard that as a plus. But you’d be as mad as a box of congressmen to follow his advice without doing some research of your own.

Secondly, another warning: the sky is falling! Now, this could, as Chicken Little discovered, be an acorn-falling rather than a sky-falling event. But this blog is being written at about 3:00 a.m. EST on Friday, Aug. 5 (how can you sleep?), and here’s where we’re up to. The current lead story on The New York Times website starts:

What began as a weak day in the stock markets ended in the worst rout in more than two years, as investors dumped stocks amid anxiety that both Europe and the United States were failing to fix deepening economic problems. With a steep decline of around 5 percent in the United States on Thursday, stocks have now fallen nearly 11 percent in two weeks.

This is a global problem. According to Yahoo Finance, Tokyo’s Nikkei index lost 3.72 percent and in Hong Kong the Hang Seng dropped 4.36 percent overnight. London’s FTSE 100, which opened only a couple of hours ago, has already dropped over 2 percent this morning, and that was after seeing about $80 billion being wiped off the value of the 100 biggest British companies yesterday. Heaven knows what’s going to happen when Wall Street opens.

Sky or acorn? You decide.

Credit card rates, the debt ceiling and now

It’s enough to make you nostalgic for the good old days. It was only last week that we had only the debt ceiling debacle to worry about, and a couple of weeks before that this blog (Credit card rates could skyrocket if debt ceiling hold, July 18) explored the potentially disastrous impact on credit card rates of a failure to raise it. It quoted Mike Thompson’s apocalyptic predictions in The Detroit Free Press:

Failure to reach a debt ceiling agreement before the August 2 deadline would mean that legions of Social Security recipients would be without income, interest rates would shoot to the moon, America would plunge back into a deep recession, our military’s ability to protect the country would be placed in jeopardy and the global economy could crash and burn.

The word “brinkmanship” is defined in the 11th edition of Merriam-Webster’s Collegiate Dictionary as “the art or practice of pushing a dangerous situation or confrontation to the limit of safety esp. to force a desired outcome.” Were the term not already to have existed, it would have been necessary to invent it just for this Congress.

Credit cards and recessions

So are credit card rates now safe? Probably yes, at least for the time being, though many expect them to rise, perhaps significantly, when prosperity eventually returns. But if today’s “meltdown,” “turmoil,” “mayhem,” “pounding,” and “plunge” (© every newspaper in the world this morning) turns out to be the herald of another recession or depression then the likelihood of interest rates staying low is probably heightened.

However, such a contraction in the economy could threaten your income, and make your job even less secure than it already is. And you really don’t want to go into a period of relative poverty and/or unemployment encumbered with high credit card debt.

So it doesn’t really matter whether the economy recovers, in which case interest rates are likely to rise, or double dips, in which case money could be in short supply. If you choose to take the advice of a non-economist who can’t tell an acorn from the sky, you’ll reduce the balances on your credit cards just as quickly as you can.

It’s a recurring theme of this blog that manageable credit card debt can in some circumstances be good. It can tide a family over during a short-term crisis, and it can give a significant boost to an economic recovery. Some experts reckon that 60 to 70 percent of the U.S. economy is based on consumer spending, so raising that level of activity could prove a prerequisite of a return to good times.

Credit card debt and obvious dangers

However, unmanageable credit card debt can, of course, be a disaster. On a micro level (and especially when coupled with high credit card rates), it can launch families into vicious, downward spirals of despair and ruin. And, as we’ve all seen very recently, it can on a macro level contribute to huge and unsustainable credit bubbles that, when they burst, do incalculable harm to the nation’s prosperity.

What’s needed is a way of encouraging responsible credit card use while steering those who can’t handle debt away from running up balances.

Credit reports that reveal more

On August 2, FICO, the company behind the systems that calculate most credit scores in the U.S., unveiled its Bankcard Growth Solution, which it described as a “unique new analytic solution designed…to help lenders improve decisions based on deeper analytic insight and accelerated learning across all stages of bankcard acquisitions and originations.”

In other words, it’s supposed to help credit card companies be smarter about whom they choose to issue cards and lend money. And it couldn’t have come at a better time. Credit card use is up, and the rate at which consumers are paying down card debt is slowing and may be reversing (see Credit card debt makes a rare uptick). Meanwhile, card issuers are falling over each other to attract new customers.

And all this is happening at a time when nothing about the economy is certain. As Andrew Jennings, FICO’s senior vice president and chief analytics officer, observed in a statement:

The ‘new normal’ in the banking industry is characterized by economic uncertainty and changing consumer behaviors, so banks have to figure out how to grow profitably despite the lack of stability. The most forward-looking banks are adopting analytic solutions that increase their capacity to learn, adapt and innovate. With its Analytic Learning Hub, the FICO Bankcard Growth Solution helps lenders make the decision that’s appropriate for each customer, learn from that decision’s results, and improve future decisions, in much faster cycles.

Much more needed

It’s unlikely that even FICO would suggest that its new offering is going to eliminate problem credit card use. To start with, Jennings says that only “forward-looking banks” are likely to adopt it, and, judging by Wall Street’s performance over the last decade, there are precious few of those around. More importantly, no profiling/data-mining IT solution is currently capable of predicting an individual consumer’s behavior with any great accuracy.

But it’s encouraging that FICO believes there are enough credit card companies out there that are taking credit risk management sufficiently seriously to make its new launch worthwhile. Perhaps they really have learned their lesson.