Credit Commentary

Credit Card Debt continues to drop further

By Zarana on Wednesday, July 15 2009

Credit card balances continued to drop in May, according to the data from the Federal Reserve, although the size of the drop marked a slowdown from the heated pace of decline in prior months.

The Fed's monthly G.19 report on consumer credit, released for month of May, indicated that revolving credit, a loan category comprised almost entirely of credit card debt, declined at an annualized rate of 3.7% in May, coming on the heels of an 11.1% fall in April. Overall, revolving debt fell to $928 billion from a total of $931 billion in April.

The eight consecutive monthly declines in revolving credit from October 2008 to May 2009 represent the longest pullback since the report began in January 1968, according to the Fed.

Meanwhile, non-revolving credit fell just 0.3% in May to $1.592 trillion. That section of the consumer credit report includes a variety of types of lending, primarily auto loans, student loans, mortgage loans for mobile homes, boats and trailers.

The consumer debt totaled $2.520 trillion in May, down a much narrower than expected $3.3 billion from April. Analysts polled by Thomson Reuters had predicted overall consumer credit would plunge by $9.5 billion. Other published reports projected similar declines.

Experts say amid the current economic climate, consumers remain wary of being burdened by debt. As a result, cardholders are reluctant to charge -- and are quick to pay down existing balances -- causing the total amount of credit card debt to fall. For the approximately 91 percent of households in the United States that are still employed, concern over shouldering debt is "the dominant factor" driving down revolving credit, according to Robert Dye, senior economist with PNC Financial Services.

Recent data bear that out. The savings rate climbed to 6.9 percent in May, the highest since December 1993 and a clear indicator of consumer caution. Elsewhere, credit bureau Equifax said the opening of new credit cards accounts declined 37 percent during the first three months of 2009 compared with the year before.

Additionally, the number of late payments has increased. The American Bankers Association announced that bank card delinquencies rose to 4.75% of all accounts in the first quarter, compared to 4.52% in the previous quarter, which was driven mainly by high job losses.

With a jobless rate that advanced to 9.5% in June, the highest level in more than 26 years, paying bills remains a challenge for many Americans. Unemployment is expected to continue to rise, said President Obama. At the same time, the new Credit Act has forced the credit card issuers to increase interest rates dramatically fueling credit crunch in the consumer market.