Credit Card Trends Are Toward Lower Balances

Friday, the Federal Reserve published its consumer credit figures for December 2009. And they show that credit card debt reduced for the 15th consecutive month. That is the longest period of decline since the Fed began compiling the data back in 1968.

Revolving credit, most of which is credit card balances, fell at an annualized rate of 11.7 percent in December, leaving $866 billion dollars still to pay down.

Credit Card Use Changing?

Some observers see these figures as (to quote Friday’s BusinessWeek): “…some indication Americans are getting their balance sheets in better order.” But it may be more complicated than that.

The Fed data also showed that non-revolving credit (auto loans, personal loans, and so on) actually went up by $6.8 billion in December. While that was not enough to fully offset the reduction in revolving credit brought about by changing patterns of credit card use, it may suggest that consumers have not become entirely averse to borrowing. So is it just their cards that Americans have come to distrust?

Credit Card Companies Less Popular?

USA Today thinks that may be the case. It ran a piece yesterday under the headline, “American consumers just say no to credit cards.” It said:

Tim McFarlin, a consumer bankruptcy attorney in Irvine, Calif., 34, stopped using credit cards eight years ago because he thought the industry’s business practices were unfair to consumers. “Any time there’s even a hint of a financial issue in the consumer’s life, the credit card company will raise the interest rate to the high 20s or 30%,” he says. “They’ll do anything they can to make life as difficult as possible.”

…The public’s opinion of credit card companies, which has never been particularly high, has plummeted during the past two years. Forty-seven percent of consumers surveyed in July said they trust credit card companies less now than they did a year earlier, according to Auriemma Consulting. Only national banks and the federal government fared worse.

A Hard Habit to Kick

In using the phrase “just say no” in its headline, USA Today was alluding to the similarities between some credit card use and drug use. Both can provide instant gratification, but carry a cost that has to be paid in the future. And both are hard habits to kick.

So just how much of the reduction in revolving credit is down to greater self-discipline and a genuinely changed relationship between Americans and their cards, and how much is down to lower credit limits and fewer new accounts being opened? Bear in mind also that some is likely to be a result of card issuers writing off some balances as uncollectable.

Good Times Starting Again?

Only time can tell whether consumers will keep those reduced balances down. But the Financial Times reported yesterday that those who have been relatively unaffected by the recession are beginning to return to their old spending patterns. It interviewed the heads of various luxury good manufacturers who identified a new readiness to buy premium and prestige goods.

One of them, Fabrizio Freda, chief executive of Estée Lauder, observed: “We view this as a return of the aspirational consumer.” And another, a senior executive at Polo Ralph Lauren, said last week that the fashion brand and retail company had “slowly begun to see the gradual return of our core luxury customer, including buyers of couture dresses that sell for more than $4,000.”

It will be interesting to see whether less fortunate people similarly revert to their old spending patterns once the effects of the recession wear off–and whether they go back to their old habits when it comes to credit card use.

Published 02/08/10 (Modified 04/23/12)