By Jeremy M. Simon
See updated story: Consumer credit card debt falls for 13th straight month, Fed says
Credit card balances fell again in October, according to Federal Reserve data, leaving the average card-carrying American household with nearly $1,000 less in credit card debt than it had a year ago.
According to the latest Federal Reserve data released Monday, credit card balances tumbled by $6.9 billion in October, marking a record 13th straight month of decline. The data, contained in the Fed's monthly G.19 report, looks at various components of consumer debt, including revolving credit -- a loan category comprised almost entirely of credit card debt -- as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers. Overall, revolving debt fell to $888.1 billion from a revised total of $895 billion in September.
Americans' credit card debt stood at $975.2 billion in September 2008. The 13 monthly declines since then have seen U.S. cardholders eliminate $87.1 billion in credit card debt. That means the average U.S. household with at least one credit card -- of which there are 91.1 million, according to payment-card industry newsletter the Nilson Report -- has eliminated roughly $956 in credit card debt during that period. That's a relief in a time of high unemployment rates and overall economic uncertainty for many families around the nation, though there's some debate as to exactly what it means.
Frugality or something else?
Taken as a whole, consumer debt fell nearly $3.5 billion to $2.483 trillion in October -- a record ninth straight monthly drop, dating back to February. While some experts say that the dropping debt levels are a sign of newfound American frugality, others say consumer psychology hasn't been fundamentally altered. Gregory Miller, chief economist with SunTrust Bank in Atlanta, says consumers are spending and will continue to do so. "As far as existing accounts are concerned, I doubt the household sector -- or the business sector -- will change their credit card spending," says Miller. He said external factors, such as lower gasoline prices over the past year, have allowed consumers to get more for their money and keep their card balances down.
Federal Reserve Chairman Ben Bernanke said in a speech Monday that "consumer spending also has been rising since midyear. Part of this increase reflected a temporary surge in auto purchases that resulted from the 'cash for clunkers' program, but spending in categories other than motor vehicles has increased as well," Bernanke said.
Those numbers would seem to be good news for an economy that's so heavily dependent on consumer spending. However, not all data is positive. Recent data shows the amount of unpaid credit card accounts fell in the third quarter. Also, a survey from the National Retail Federation showed the number of consumers who shopped during the Thanksgiving weekend increased from 2008, but the amount of money spent per consumer fell 8 percent
Banks play a roleRubin says that rather than attribute the ongoing drop in card balances entirely to thrifty consumers, banks are also keeping card balances under pressure. "Are people not spending on credit cards because they don't want to, or are people not spending on credit cards because they can't?" he asks.
Evidence suggests that, at least in part, consumers may not have a choice when it comes to their card spending. Card issuers have been tightening credit standards, closing existing accounts and writing off bad debt they have been unable to collect. Some of banks' efforts to protect themselves from losses appear to have worked. TransUnion says that late card payments fell to 1.1 percent in the third quarter from 1.17 percent on the second quarter. TransUnion also reported that the average balance on outstanding bank cards fell to $5,612 from $5,710 one year earlier.
Rubin notes that even making a small minimum payment can keep accounts current and out of delinquency. That's why he is hesitant to cheer the lower delinquency figures.
However, when consumers are seriously delinquent, lenders may give up on ever collecting those unpaid balances. Often, Rubin says, it may be cardholders with the most substantial balances who find themselves unable to make payments when times get tough. "I would strongly suspect that those having the write-offs have the biggest use of credit," he says.
After a write-off at one bank, these consumers may no longer be able to qualify for credit from another lender. That means they might not be able to find the credit to spend, even if they wanted to spend it.
"It means there's not as much a change in psyche as there is a change in availability" of credit, Rubin says.
