Credit Balances are Declining

Calculated Risk reports:

From MarketWatch: May consumer credit down in fourth straight month

U.S. consumers reduced their debt in May for the fourth consecutive month, the Federal Reserve reported Wednesday. Total seasonally adjusted consumer debt fell $3.22 billion … Consumer credit fell in eight of the past ten months. … This is the longest string of declines in credit since 1991. Credit-card debt had the biggest drop in May, falling $2.86 billion, or 3.7% to $928 billion.

Consumer Credit Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 1.8% over the last 12 months. The record YoY decline was 1.9% in 1991 – and that record will be broken over the next couple of months.

Note: Consumer credit does not include real estate debt.


22 Responses to “Credit Balances are Declining”

  1. 1 felicia hall July 8, 2009 at 12:49 PM

    To me this graph illustrates the effect that a recession has on the spending habits of consumers. If you notice each year a receession occurred the credit card debt percentage dropped. People aren’t able to apply for more credit, nor are they able to swipe that credit card that at one time had a low interest rate attached. I guess the phrase, “What goes up, must come down,” stands true in all forms. It is also known that this point in time will not last forever. Although, when and how this will change in the opposite direction is my question.

  2. 2 Hailey July 9, 2009 at 9:33 AM

    I agree with Felicia that the when and how of this change is important to the CURRENT stablity of our nations economy, but to add to that note I feel that while we are down, what is of utmost importance is for people to begin to educate themselves about why things are low and why this credit dominated society has to learn about their mistakes in order to change them in the long run, isn’t that why it’s called learning. I have spoken to a friend recently, whose family is the epitomy of the problem with the state of our economy; her mother has been layed off since January and her father who is divorced from her mother, just recently took out a loan to build a new house. Just in the past 7 months of these massive changes, the mother is still unemployed but recently decided to buy her daughters bmw after her lease was up, therefore souly dependent on her credit card to pay these car payments, which she is already having difficulty paying her monthly bill due to her job layoff and because she has no savings, and the father has defaulted on his loan and can not build his new house. In the middle of all of this recession turmoil, these were their choices, and the daughter to make matters worse, has decided to QUIT school, in order to help bring home the grocheries. I am appalled at this story and the fact that the education which could truly help turn this situation around in the family, is the last “concern” for them, rather its trying to turn their lives around with “new material objects” that they really can’t afford to own in the first place. Will people really ever learn or are we going to wind up continually putting other people in “debt” in order to help ourselves out, when really we are just digging a bigger whole for ourselves in the long run.

  3. 3 Tanisha/ Econ 100 July 9, 2009 at 10:34 AM

    I think it’s great that credit card debt is decreasing. While in this state of recession I think people are beginning to realize that they need to make sure their finances are spent wisely. No more purchasing things we WANT. We have to purchase things we NEED. And it’s hard enough to pay bills, so that is where extra money is going to. But how long will it last? The percentage may drop for a couple of months, but it can rise just as fast.

  4. 4 Dave Stevenson July 9, 2009 at 11:37 AM

    I am not sure about the rest of you, but I know that my credit card rates have gone up, not down, and not due to late payments or anything along those lines, simply due to the banks “needs”.

    It’s the perfect paradox – banks raise rates at times like this to help recoup costs…they limit the new credit lines due to the “uncertain times”…this actually contributes to the problem by limiting the availability of credit to people, which limits spending, which makes it harder to recover from the recession. Banks are so unstable right now they can’t afford to have any high risk, and this limits possible spending…what can you do?

  5. 5 Shannon Lackey July 10, 2009 at 9:38 AM

    I am glad to see credit card debt decreasing. Although interest rates are rising people are wisening up and realizing purchasing on credit is not a good idea. Spending outside what you can afford is what got us into this recession. I understand in hard times you need to borrow or use credit, but people learning first hand how easy it is to get into debt and then how hard it is to get out is what is changing the way we spend. I think our society is moving from that of consumers and spenders to more logical money handling wsys. This recession is hard on almost everyone but the silver lining i think is the learning experience of overspending and the trouble you can get into on a small level of a single family to that of a whole country.

  6. 6 Jessica Tsai July 10, 2009 at 11:09 PM

    This article exemplifies the effect that the current economic situation is taking on consumers. A while back it was extremely easy to apply for a credit card and there were numerous benefits stemming from starting one. However in recent times, both credit card companies as well as consumers are changing perspectives regarding the issue- companies are investigating individuals much more precisely prior to issuing them a card and in many cases will deny requests due to the vast amount of credit card debt already piled up by other consumers. On the other hand, consumers are becoming more wary of their spending and taking advantage of methods such as using coupons or carrying cash to avoid the temptation of overusing the credit card and going into debt. This change in attitude is certainly prevalent nowadays but I fear that once the state of the economy begins to improve, consumers will have a sense of security that may bring back frivolous old habits once more.

  7. 7 Jessie Maguire July 13, 2009 at 12:16 PM

    It is easy to apply for a credit card and to start using it to purchase items, however for most it isn’t so easy to see possible consequences of this action. With the way the economy is now every dollar counts and people are more aware of their money. The decrease in the credit debt indicates that people are begining to monitor spending and are becoming more conscious of how their money is spent. With people really thinking about how they choose to spend money there is hope that we can use the momentum to aid in creating budgets for other things such as towns, and states, however there is no guarantee that we will not return to our old habits.

  8. 8 Kittygirl707 July 13, 2009 at 5:24 PM

    I for one got tired of the credit card companies’ greed. They bumped up rates, bumped up fees, reduced credit limits, and started behaving badly in response to the “crisis.” At the same time all of the banks cut way back on the amount of interest they were giving for savings products. I looked at how much I was earning vs how much I was paying. I ended up paying off all of my credit card debt as the ROI was significantly better. I don’t think I’m alone in my actions and I think it’s having a definite impact on the balances that people are (not) willing to carry on their credit cards.

  9. 9 Sanamjit Bains July 13, 2009 at 8:45 PM

    This declines is the result of lower consumer spending due to recession, height rates of unemployment and lower availability of credit. It will probably continue to go down in the near future until equilibrium is reached. When people will buy less there will be less supply. Unnecessary spending will reduce, people will adjust to new spending level which will be more realistic based upon real income as appose to cheap credit.

  10. 10 Dave Crider July 13, 2009 at 8:49 PM

    Reading some of the articles I agree with the idea that people are not out spending as much due to the economy. Also one article stated how some are quick to pay down there credit cards due to the economy. But I wonder if people filing bankruptcy on their cards is causing the drop also. Which kind of goes along with the graph showing a drop during each recession.

  11. 11 wongt July 14, 2009 at 4:01 AM

    I agree with everyone’s posts here. Its a combination of less credit available and people being more wary on how they spend their hard earned dollars. I feel that its just a natural thing to occur during these times. But, when the economy picks itself up and people start feeling that there is an excess, they will go back to their old spending habits.

  12. 12 KENDALL HOXSEY July 14, 2009 at 10:19 PM

    In times of only gloom and doom it is good to hear that Americans are reducing their credit card debt. However small the amount is in the long run it is still significant. I think that this habit goes beyond the want and need arguement. I remember reading somewhere that Americans spend more than what they actually earn versus the Brits who spend about 80% of what they earn and other europeans spend only some of their income while still saving. What makes Americans so different in this practice. It seems logical to spend only what you earn and then save a little money. But for some reason that has escaped most Americans.

  13. 13 Hong Truong July 15, 2009 at 11:39 AM

    I agree with Kendall, “Americans spend more than what they actually earn”. I am one of the americans that do that. I spent 70% of the money I earn, and 30& I save in my deposit. I have tried different technique to decrease my spending. Such as, avoiding buying things that are unnecessary and buy start buying something that I do need. During the past few years, I been very careful with using my credit card. I used my credit card for big things, such as printer to only built my credit. I personally believe that it is bad that people are not spending much due to our economy because it is closing a lot of businesses down. I believe that if the economy is bad, WE SHOULD START SPENDING to make our world “round”. When our economy is good, thats when we should start saving!

  14. 14 Evangelina Alvarez July 15, 2009 at 1:21 PM

    As a student I have been able to get a 0% interest credit card from march until december. As of January they plan to jump my interest rate to 25% so I have to pay it off. As a first time credit card holder, I’m not too shocked but the intent of the creditors is really to get me into debt and make a lot off me, so there is no doubt in my mind they’re hungry for money. Although, because of our economic downturn, we aren’t giving in to them, were not spending. My mom has been earning credit for probably 40 years now and she had a low interest credit card which she had $15,000 on (she can’t say no to Macy’s.) She missed one payment this past month by a day, we’re selling our house and she just lost track of the date and BAM, her interest rate jumped to 20%interest rate. The creditors are hurting just as bad as we are, but at least were able to eliminate some of our debt meanwhile they’re trying at all costs to make us more in debt to sustain their companies. You’d think a few years back they’d have some protection for long time customers, I mean it’s Chase, but not with the economy the way it is. What’s even worse is she can’t even get a loan right now, the banks just can’t put out a $15,000 loan.

  15. 15 Caroline Rice July 16, 2009 at 2:36 PM

    I am delighted to see this trend and hope that it would last long after we come out of our recession. I think that this is caused by two things – fear of creditor behavior and tightening of consumer budgets. One, we have all heard the recent horror stories of people having their interest rates increase; their credit limits decrease; or their accounts being closed. The effect that these changes have on people’s credit scores is staggering. On paper, a person can go from a good credit risk to a poor credit risk due to one of these changes made by their creditor and the creditor need not give any explanation to the consumer or to the credit bureaus. Two, with so many people losing their jobs, there has been a tightening of the belt in most consumers’ budgets. While you may not be able to get a raise or take on more work, you can certainly spend the money you have more wisely. Perhaps you might not use your credit card and, therefore, not increase the amount of debt that you owe. Or you might be paying more to your creditor to bring down your debt and reduce your monthly minimums, as you never know how long you may be employed. Many people reserve their credit card usage to luxury items which are not on the top of anyone’s purchase list in these uncertain economic times.

  16. 16 Carolyne Abrams July 20, 2009 at 9:29 PM

    This is awesome. It is great to see that the U.S. consumers are getting their spending habits under control. I am playing right along with the statistics and have been consciously spending much less and paying off my credit cards as quickly as possible. in times like this, it is a reminder of how dangerous debt is and how important it is to keep spending habits under control. The increase in interest rates has not helped, but I don’t think that is the major contributing factor to why people are paying off their credit cards. Frivolous spending right now is looked at so negatively and the desire to have the best vacation or the $200 jeans is not quite as enticing as it was 18-24 months ago.

  17. 17 Joseph Garcia July 23, 2009 at 7:41 PM

    Evangelina, did you get your credit card from some advertiser in college? I’ve heard of students getting scammed into getting credit cards with very low interest rates and then suddenly having to pay back creditors more money than they ever borrowed. It sickens me that there are scammers like that, and I’m glad that you have awhile before the interest is raised.

  18. 18 Amanda Smith July 24, 2009 at 2:20 PM

    Well it seems that there are some good things that come out of recessions. The graph illustrates that during every recession at least between 1970 and now, credit debt decreased. This could have many explanations, but it seems that during a recession people tend to spend less…no more shopping sprees. So this not only prevents the credit card debt from increasing, but it also provides the people with more money to spend on paying off their debt. Works out nicely.

  19. 19 Kit t Kat July 24, 2009 at 5:01 PM

    It is good that credit balances are falling. People either are paying off their bills or are not buying things on credit. Prehaps due to the recession people are realizing they need to spend more wisely and are becoming wise consumers. Credit cards take a lot of people’s money. For example I have a credit card and brough clothes for 200 on credit. Each bill I get in the mail I pay a small amount but with each bill I have to pay interest. When I am done paying the total amount off it will be higher than $200 (what my clothes cost). To me it is not worth buying things on credit. The down side to paying with cash is that it does not establish a good credit history so that makes it harder for people to obtain things when companies look at people’s credit report.

  20. 20 Lauren Swartz July 29, 2009 at 12:11 PM

    A lot of posters theorize that an improved economy will change peoples’ spending habits. The causal effect here is exactly the opposite- an upward trend in Americans’ spending habits will improve our economy. While I certainly agree that the high levels of credit card debt were not benefitting our society in many aspects, the structure of our capitalistic market dictates that consumers SPEND! In order to increase profits our corporations need to keep wages down, but still get Americans to buy their product. So, lo and behold the credit market develops. And like all businesses credit card companies are looking to increase their bottom line, hence the fees and interest rate penalties etc etc.
    “Living within our means” will only hurt the US economy, unless the entire structure of our economic system is altered.

  21. 21 Carolyne Abrams August 3, 2009 at 12:01 PM

    Lauren- I agree with you 100%. People do need to spend, spend, spend. That is the only way we will be able to recover from the recession. But, I do also hope that people will have a bit more balance with their spending versus debt.

  22. 22 Maricar De Los Reyes August 6, 2009 at 4:09 PM

    It is good to spend. But spend the money that you have wisely. The more credit cards you use in a recession, the more debt will pile up, and the more trouble a person will be in. So its a good thing that the credit card debt is down at this time, because people are being wise to not increase the debt they already have. The lower income coming in, means less money to pay for debts that have high interest.

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