Consumer credit plunges as recession forces debt cutback
Filed under: Economy
Whether it's by choice or out of necessity, U.S. consumers are cutting back on borrowing like never before, according to Federal Reserve data.Financially hobbled banks are reluctant to lend. And with unemployment rising and housing prices still falling, consumers are hesitant to borrow. Those forces are combining to push credit card balances, auto loans and other forms of consumer credit lower by a whopping $21.6 billion in July, the biggest decline on record.
That's equivalent to an annual decline of 10.4 percent, the Fed said. It's the sixth consecutive month the measure of consumer credit has contracted. In June, it fell by a revised 7.5 percent.
Signs abound that people are less willing to borrow. Take, for instance, the growing popularity of debit cards. Both Visa (V) and MasterCard (MA) say the proportion of debit transactions on their networks is growing. At Visa, the world's largest payment network, they've surpassed credit card purchases.
And there's less credit available to those who do want to take on more debt. A Fed survey of banks found that most tightened lending standards in the second quarter of this year and few foresee relaxing them anytime soon.
Revolving credit, comprising mostly credit card balances, fell eight percent in July. Meanwhile, non-revolving credit -- think car, student and personal loans -- fell 11.7 percent, despite the government's "cash for clunkers" program giving a huge boost to auto sales.
Those are huge declines, but are they permanent? Will the current recession turn a generation of Americans against debt? It may be too soon to tell, but the answer to those questions will have a profound effect on the economy. Consumer spending constitutes nearly 70 percent of U.S. gross domestic product, and much of that is fueled by debt.
If borrowing-backed buying is on the way out, some other engine for the economy will have to be found.
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Reader Comments (Page 1 of 1)
9-08-2009 @ 10:39PM
asmara66 said...
People are paying down their credit cards and are loathed to add any new debt for whatever. And their savings rate has not increased and may in fact declined. Why not pay down your 15-18% card balance rather than put your savings in an account that pays a whopping 0.015%, or less for that matter. My money is on saving the 15-18% finance charge, not earning 0.015%.
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9-09-2009 @ 8:51AM
Elsie said...
I believe that Americans are doing there best to get rid of their credit card debt because they are tired of being ripped off by the banks. In my case I had an agreement years ago and borrowed 10000.00 and promised a 3.99% interest rate and a 2% of balance due payment. I have faithfully paid all debt, never been late on any credit and have an excellent credit rating. So two months or so ago I am notified by the bank that they are changing there agreement no ablsolutely no reason or nor fault or change in any credit rating of mine. They informed me that my payment would no longer be 2% but it was being raised to 5% of the balance. This bank was Chase bank. I asked if I might close the account and continue to pay the balance at the agreement rate of 2% and they told me no I may not and there was no way to not have to pay the 5%. That new payment amont on the amount I still owed went from 115.00 payment last month to a 265.00 payment this month. Because the interest (special rate they gave me) was so low they think if they change the payment to 5% witch is 2 1/2 times what a person is used to paying, that the person will not be able to pay those large payments therefore be late on payments. When the person is late on the payment they automatically raise the interest rate from the 3.99% to the default rate of 29.00% or whatever outrageous loan sharking rate their default rate is. Some poor person who owes a lot may of had a 500.00 payment, under this new agreement there payment would raise to 1250.00 a month. Just plain crooks trying to force people to be unable to pay so they can nail them with the default rate and rape them totally as then it too will affect there credit and raise the interest rates on all their other accounts. Thank God I could and will pay the required amount. But in todays economy there are many who cannot afford to pay 2 1/2 times what they are used to paying. I asked them how in the heck they could do that when the agreement I (transferred the money) under stated my payment would be 2%. They told me the agreement was not a contract. Now who in heck do you know that can have a written agreement and it is not a contract. Good Lord will they ever stop ripping off the American people. It is us the American people and our children who are, and are going to suffer for years and years to come because we the American people bailed out the banks and gave huge amounts of money to those same CEO's who are now just raping the American consumers. So I am sure, the American people who are informed of just how badly the money makers, and banker have and will continue to rip them off when agreements are nothing more than temporary words on a piece of paper, are finally learning to take out that ATM card and pay, rather than that credit card. They also have the right to raise the interest rate on that card any time they want. And yes the federal government has finally put a limit to the amount they can raise it but that will not go into effect for another year plus. Long after they have devasted God onlty knows how many American families for the rest of their lives. Poop on the banks, poop on their greedy CEO's. Anyone who lives above their mean after seeing what the banks are capable of doing really need to have your head examined.
I hope you all pay real close attention to what is being said and for gosh sake make sure you read those notices your credit card holders send you. I would not even known they were raising the rates had I not been informed of the banks crimes. I paid one of the large ones off just for that reason. Why let the money sit in the bank at .25 or less interest and let them keep getting their huge cut. Also why pay another huge payment every month too because they raised the payment amount. UGH
Hugs Tenderspiri
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9-21-2009 @ 12:18PM
JB said...
I am unsure of how these numbers are calculated, but let me ask it here.
When a consumer files for personal bankruptcy and the debt issuer 'writes-off' the debt, does that reduce the consumer debt number? For example, if I have $10,000 in credit card debt, it will count as $10K toward the total consumer debt. However, if I declare bankruptcy and my debt issuer writes off that $10K, does the total consumer debt number get reduced by $10K?
Is it possible that the significant reductions in total consumer debt are actually being powered more by lender write offs and not necessarily people paying off debt?
I don't know the answer here - will write offs impact the published numbers?
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