Credit card debt makes a rare uptick
The Federal Reserve’s monthly consumer credit report for May was released July 8. And it showed that “revolving” credit (which is 98 percent credit card debt) jumped that month at an annualized rate of 5.1 percent to $793.1 billion. That would be a significant increase at any time, but it is especially telling because it follows consistent falls.
Credit card trends or blips?
This is only the second time in 28 months that credit card debt has risen, and on the previous occasion, in December 2010, the annualized increase was only 3.5 percent, a number that might have been at least partly explained by consumers momentarily loosening their purse strings for holiday spending. The Fed originally thought that there had also been a rise in March, but it has since revised its figures, and there was actually a small fall that month.
When it comes to debt, credit card trends cannot be identified by a couple of months’ data, and the December and May figures might yet turn out to be freakish blips. However, 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
Credit card debt in context
On July 5, The Wall Street Journal provided some context for what has been happening. It reported that in the third quarter of 2007, at the height of the good times (remember those? they weren’t a dream), Americans had on average accumulated total debt equivalent to 127 percent of their annual incomes.
Given that this debt includes mortgages, 127 percent may not sound too scary, until, that is, you compare it with the same number for the 1990s: an average of 84 percent across that decade. The WSJ reckons that it was down to 112 percent by the first quarter of this year, though some of that is probably due to credit card companies and other lenders writing off and passing to collection agencies supposedly uncollectible debt.
Bankruptcy rates down
The benefit of that reduction in debt was seen July 5 when the American Bankruptcy Institute (ABI) released figures compiled by the National Bankruptcy Research Center. These showed that, in the first half of this year, 709,303 American consumers filed for bankruptcy, down 8 percent from the 770,117 who did so during the same period in 2010.
ABI executive director Samuel J. Gerdano commented in a statement: “The drop in bankruptcies for the first half of the year shows the continued efforts of consumers to reduce their household debt, and the overall pull back in consumer credit.”
Credit card news mixed
Such data are music to the ears of those who run credit card companies. They’ll also be cheered by the fact that, according to the American Bankers Association (ABA), delinquency rates for credit cards during the first quarter of this year were running at 3.40 percent, and remain well below their 15-year average of 3.95 percent.
However, the credit card news isn’t all good. The same ABA press release, dated July 7, reported that card delinquencies that quarter were up slightly (just 12 basis points) on those for the last three months of 2010. In a statement, ABA chief economist James Chessen explained:
Rising gas and food prices took a big bite out of family budgets in the first quarter of 2011. With family incomes already stretched, even small increases in daily living expenses can be enough to derail the ability to meet debt obligations. Consumers are feeling insecure about the economy and whether their financial resources can carry them through until conditions improve. With a slow-growing economy and weak job growth, there will continue to be financial stress that will make it hard for some people to pay their bills on time.
Credit card debt good or bad?
For some, all forms of debt are bad, bordering on the immoral. And, certainly, unmanageable debt on credit cards or elsewhere can blight the lives of individuals and families, and lead to untold stress and misery. However, there is another side to this coin.
The New York Times recently reported that “Consumers account for an estimated 60 to 70 percent of the country’s economic activity…” That’s a sobering thought, especially at a time when unemployment remains stubbornly high, and many people’s disposable incomes are a tiny fraction of what they used to be. It’s difficult to see how the economic recovery can gain traction without higher consumer spending, and it’s equally hard to imagine that happening these days without increased borrowing.
The trick this time around might be for credit card companies to be much more selective in their lending. They need to go beyond simple credit scores, and profile borrowers in more depth, differentiating the desperate from the responsible, including those who’ve been through a bad patch but who are now once again creditworthy.
Some credit card issuers claim that they’re already doing that. But can they pull it off? Who knows? But if you watch this space in the coming months, you’re going to find out.
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