Consumer credit plunges as recession forces debt cutback

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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