Editorial Policy

Consumer Credit Card Debt Is Up

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By Eva Norlyk Smith, Ph.D.
February 17, 2011

U.S. consumers turned to their credit cards in 2010 to help finance holiday spending, pushing total revolving credit up in December for the first time in two years, says the Federal Reserve.

Whether bolstered by increased consumer confidence or boosted by pent-up demand, holiday retail sales were also unexpectedly strong. According to a preliminary report from the National Retail Federation, holiday sales for November and December increased 5.7 percent to $462 billion — the largest increase since 2004. The National Retail Federation originally forecast just a 3.3 percent increase.

Accordingly, revolving credit, which consists mostly of credit card debt, rose $2.3 billion in December, bringing the total amount of revolving debt up to $800.5 billion — a 3.5 percent increase.

The rise in outstanding credit card debt is a major change from recent consumer debt trends. Credit cardbalances peaked at $973.6 billion in August 2008. And in the aftermath of the credit crisis and the resulting economic downturn, consumers and banks alike have pulled back on credit card usage and lending. As a result, revolving credit has declined for a record 27 months in a row, dropping by almost 18 percent, or $175.4 billion before the December uptick.

The December increase in consumer credit card debt follows a five-month rise in non-revolving consumer credit, which is largely a measure of mobile home loans, student and car loans. Non-revolving credit climbed by 2.8 percent in December to $1.6 trillion. Economists had originally projected that December 2010 would bring an overall increase of $2.4 billion in both revolving and non-revolving credit; but the real number wound up being much higher: $6.1 billion.

The rise in consumer credit usage is likely to continue, as banks begin to ease lending standards further. A recent Fed survey of senior bank loan officers indicated that banks and credit card issuers are gaining confidence and are more likely to lend. Most banks expect that credit card late payments and charge-off rates will improve this year and that defaults will ease in other major loan categories as well. Credit card delinquencies and charge-offs have already been on a steady downward trend over the last several months. Additionally, banks reported an increased demand for business loans for the first time since 2006.

But while credit availability is slowly improving, lending standards appear to be loosening the most for business loans rather than for consumer loans. The Fed survey indicated that while banks are easing standards and terms for commercial and industrial loans, changes to the terms of consumer loans are mixed.

It will take months to determine whether the upsurge in December credit card spending is a fluke caused by holiday shopping and pent up demand, or, whether it is a sign that consumer confidence is slowly resuming. Consumer spending makes up about 70 percent of the economy and is a key driver of job creation. Hence, any sign of increased consumer spending is widely believed to be an early predictor of economic recovery.