With Consumer Credit Up Sharply, Is America Releveraging?

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Credit cardsAfter two years of relative frugality caused by the financial crisis, Americans are again borrowing in a big way. Credit card debt is spiraling upwards, car loans are fueling big sales in Detroit and even stock market investors are loading up on debt.

A series of data releases about consumer borrowing this week paints a picture of an economy that's rebounding smartly from its earlier doldrums. But have consumers learned any lessons about loading up on the red ink?

According to the Federal Reserve, outstanding consumer revolving debt, which is mainly credit cards, increased from $807.2 billion in November to $826.6 billion in December, a 2.5% increase in a single month. Outstanding nonrevolving debt, such as auto loans, rose from $1.608 trillion in November to $1.611 trillion in December. Automakers have reported a sharp increase in sales in the fourth quarter, with Detroit taking the lion's share of the jump.

The New York Stock Exchange released data
showing that margin credit -- money investors borrow to buy shares -- increased to $276 billion in December, up from $233 billion at the start of the year. That reflects a sharply higher stock market but also an increased appetite for borrowing.

Combined, the two reports raise a key question: Is America releverging?

"Not Grounded in Reality"


The increase in monthly credit card outstanding balances was the first reported rise in 27 months. But Odysseas Papadimitriou, CEO of Evolution Finance, which publishes a credit card comparison site called cardhub.com, says the Fed's figures may significantly underestimate the actual increase in borrowing.

That's because the Fed include charge-offs of credit card debt that consumers can't pay. Assuming charge-offs were around $5 billion in December, Papadimitriou says outstanding debt may have grown by $25 billion instead of $19.6 billion, 20% more than the Fed reported.

"There is a segment of the population whose expectations are not grounded in reality," Papadimitriou says. "They think their spending can go back to pre-recession levels, when in fact the housing bubble was responsible for allowing them to have that level of spending."

Nonetheless, Adam Levin, chairman of credit-counseling website credit.com says he has detected a new sense of frugality among consumers.

In a poll credit.com conducted last month, when asked how they intended to deal with their holiday debt, 60% of respondents said they are planning to pay the debt in full, 13% said they would carry a credit card balance and 26% said they came out of the holidays with no debt. Last year, only 45% said they intended to pay off their debt in full.

"A New Sense of Frugality"

"People were feeling better and spent, but they were a bit more frugal," Levin says. "That could be because they were forced to – banks shut down a lot of accounts and raised credit limits – because they are fearful of what may be an uncertain economy or because there is a new sense of frugality basically branded into us, based on what we have lived through in the past few years."

Levin says credit card solicitations were much higher this year than last year, but they were mainly aimed at consumers with high credit scores.

However, another Fed survey does show a loosening of credit, saying "banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving consumer credit card applications."

While consumer spending is great for the economy, is increased borrowing good for the consumer? It is -- if it's done prudently, within one's income limits. But it will lead to only more trouble if new borrowings are being used to fund purchases that can't be easily paid off.

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Lisa

Say it isn't so. I was hoping that Americans would learn a very big lesson. I know that this recession(if you can call it that) has taught me one.

February 11 2011 at 8:19 PM Report abuse rate up rate down Reply
selectbooksvideo

keep writing this story AOL over and over and you may believe it yourself but not fooling us " SMALL PEOPLE" actually we are smarter than anyone at AOL or in Washington

February 11 2011 at 1:11 PM Report abuse +1 rate up rate down Reply
Hello

Who are they kidding. The economy is gone to be just fine!!!
As long as the government doesn't try to save the oil company's!!!!
Put this into the You Tube Search box and see for yourself!! :


NBC WAVE TV 3 News Video Aquygen HHO Water Fuel Breakthrough

February 11 2011 at 9:11 AM Report abuse rate up rate down Reply
hi bev

Banks gave a lot of people loans that should not have been given out. Then the banks asked for bailouts because of mistakes they made. When an individual makes mistakes they have to pay for their mistakes yet the banks were not held accountable for what they did wrong. People have now lost their jobs and have been put in the position of using credit cards to make ends meet, food etc. A lot of these people know they will soon be in the position of not being able to repay the credit cards for what they are borrowing but they have no recourse. With more and more companies going for cheap labor they are sending the jobs to other countries. Its time the government put a harsh penalty on companies sending jobs elsewhere. Its time we put a harsh penalty of companies hiring illegals. We have so many problems in this country they are too many to even count anymore. Obama gave credit card companies a headsup that they would soon not be able to raise interest rates that they quickly went ahead and raised them before the law went into affect and that created more of a mess for people. When you look at problems they usually come from the top - meaning the government and its the average joe that usually ends up paying the heavy price for their mistakes

February 11 2011 at 8:12 AM Report abuse +1 rate up rate down Reply
Charles

allisonisa,

No individuals were helped whatsoever by the government bailouts, ONLY the banks. Individuals got screwed completely.

February 11 2011 at 6:48 AM Report abuse +2 rate up rate down Reply
1 reply to Charles's comment
MY LORD

Not really, banks have been forced to renegociate interest loans

February 11 2011 at 7:10 AM Report abuse -1 rate up rate down Reply
Charles

The banking industry wants people in debt. THey want to entice people with lower rates again so they can gradually jack them up again. They bombard people with credit offers to try to make it irresistable to get sucked in again. GIven how the govt bailed them out before and how many congresspeople's pockets they're in, they have no reason to believe they won't get bailed out again.

February 11 2011 at 6:46 AM Report abuse +4 rate up rate down Reply
bshum3

Then some people never learn . You can see them lined up , bent over , holding their jars of lubricant . The credit "industry" screwed us before and many of us will never give them the chance to do so again Many of us were never late or payed a partial payment. They neatly destroyed our credit by raising the debt to loan ratio by raising the percentage rates through the roof while cutting off credit lines and lowering the buying power of our cards . Our grandpaerent never had cards and used neighborhood banks . They also never owed more than they earned or could pay . This credit system is nothing more than a false economy that has led us to insolvency .

February 11 2011 at 6:37 AM Report abuse +4 rate up rate down Reply
i67darrin

If this article holds any truth, we could be seeing the beginnings of another bubble being formed. Hopefully, they'll be no bailiouts this time. Those that are knowingly spending beyond their means to try and keep up with the Jonses' should realize there's no safety net or life raft this time.

February 11 2011 at 6:36 AM Report abuse +3 rate up rate down Reply
hi bev

I think most Americans are sick of it. There are people bailing out on their homes and people just refusing to pay their credit card bills. The mind set What can they do to me if I just don't have it but I will have a good time while it lasts. The one thing this country hasn't learned is patience and everything in its time. If you can't afford it chances are you don't really need it. I use to work for a major credit card company My only thing to say to people about credit cards is They are not in business to help you but in business to make money. THEY ARE CROOKS BELIEVE ME

February 11 2011 at 6:08 AM Report abuse +3 rate up rate down Reply
War Room

The government continues to rely on the US Citizens to ignite the economy and the US citizens are getting poorer, just look at the value of our homes. It is the government's fault since there is not enough corporate governance to regulate the banks and other companies to not drive the economy into the ground. I am sure the government is sitting back thinking the US citizens will bring the economy back. When is enough, enough?

February 11 2011 at 5:49 AM Report abuse +1 rate up rate down Reply
1 reply to War Room's comment
MY LORD

Businesses are over regulated now, It's the government fault for spending money THEY dont not have on bad ideas like the failed stimulus and Obamacare

February 11 2011 at 7:08 AM Report abuse +2 rate up rate down Reply