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US consumer credit card debt fell $7.32 billion in May, at an annualized rate of 10.5 percent, according to a recent Fed report. The drop represents a considerable acceleration compared to the first quarter’s 9 percent annualized decline. Economists had predicted a far more modest $2.3 billion decline.
The $7.32 billion decline in revolving credit brought U.S. credit card debt to $830.83 billion. Since its $976.1 billion high in October of 2008, total consumer credit card debt in the U.S. has dropped over $145 billion with consistent decreases throughout the past 20 months. Furthermore, revolving credit card debt isn’t the only category that has taken a steady dive: total outstanding consumer debt, excluding mortgages, has dropped 15 times in the past 17 months and decreased a further $9.1 billion in May.
It’s difficult to tell what percentage of the continued plunge in credit card debt stems from Americans’ new credit habits, and what percentage can be attributed to write-offs of bad debt, as well as banks’ increasingly conservative lending policies. Banks have been cutting back credit limits on existing credit card accounts, and have become far more selective in accepting new credit card applications. In addition, major credit card lenders like Citigroup, Bank of America, Capital One, and Chase are shouldering record credit card defaults, a factor that has contributed considerably to the dramatic decline in credit card debt levels over the past couple of years.
With unemployment continuing in record territory, analysts also point out that greater concern for the future has left Americans more hesitant to charge today and pay tomorrow. Indeed, the Commerce Department has reported a rise in the U.S. savings rate from its low of early 2000.
In addition, a survey conducted by the consulting firm Market Strategies International reports that nearly 42 percent of consumers are paying with cash more frequently than they were a year ago. An increasing number of consumers are also favoring debit cards over credit cards; MasterCard International reports a 10.5 percent rise in debit transactions, and Visa reports 17 percent increase.
Regardless of which factors have played the largest role in the decrease in outstanding credit card debt, the 20-month decline in consumer credit is an indication of a substantial ongoing deleveraging of consumer finances, which hopefully will result in a more stable financial foundation for millions of Americans.
