Consumer credit card balances fell for the fourth straight month in October, according to new data from the Federal Reserve, as recession-scarred credit card holders remain cautious about piling on new debt.
The Federal Reserve's latest G.19 consumer credit report showed a TK percent drop in revolving debt as consumers held tight to their credit cards. Revolving debt, which is made up almost entirely of credit card debt, fell $TK billion in October to $TK billion. However, despite October's decline, experts predict that card balances will rise in the last months of 2011 as consumers take a break from paying down debt.
"Consumers are paying a lot of attention to the debt they have on their credit cards and are gradually trying to pay off that debt," says Gregory Daco, senior economist with IHS Global Insight.
But a pent-up desire to spend may cause consumers to let loose during the holidays. "We've been unemployed for four years, we've been on an austerity budget and now people are just getting weary of not spending money," says Tony Plath, a professor of finance at the University of North Carolina at Charlotte.
The Fed's monthly G.19 consumer credit report also looks at nonrevolving debt, which includes auto loans, student loans and loans for mobile homes, boats and trailers. Nonrevolving debt went up TK percent to $TK trillion. Overall consumer credit -- the combination of both revolving and nonrevolving debt -- also increased for the second straight month, after seeing a rare decline in August. Total consumer credit jumped by TK percent in October, hitting $TK trillion.
Shaky economy, persistent debt add to cardholders' worries
Experts say that part of the reason revolving debt levels continue to decline is that many consumers are still burdened by large credit card balances and are trying to clear their existing debts before they take on new credit. That's what industry types call "deleveraging." "It's taken some time for consumers to deleverage," says Daco.
"Incomes are growing at a slow pace," he notes, while unemployment remains stubbornly high. That combination makes it hard for consumers to pay off balances as quickly as consumers would like.
Shaken by years of bad economic news and persistent unemployment, cardholders have also remained wary of charging more than they can afford to pay off in a reasonable amount of time, say experts. "You can't listen to the news and pick up a newspaper where it's not negative," says Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup. And that has "a cumulative effect ... We're all collectively in search for some good news. As long as you hear things are uncertain or negative, people are very cautious."
Consumer confidence declined sharply in October, according to the Conference Board's Consumer Confidence Index , after suffering a steep plunge in August and recovering just slightly in September."Consumer confidence is now back to levels last seen during the 2008-2009 recession," said the Conference Board's Lynn Franco in a statement. "Consumer expectations, which had improved in September, gave back all of the gain and then some, as concerns about business conditions, the labor market and income prospects increased."
John Hedtke, a freelancer in Eugene, Ore., says the uncertainty of the labor market has played a large role in why he's made a concerted effort in the past several months to pay down his high credit card balances. "Given how tentative it is to have a job, I like the idea of having a really large savings account and no debt so I don't feel beholden to my job," says Hedtke. Not having debt "gives me a lot of freedom."
Katerina Taylor of Atlanta, Ga., also started aggressively paying down her card balances this year after realizing how much she could save at the end of each month if she didn't have a balance on her card. It's "really about putting myself in a better position net-worth-wise," says Taylor. "Now if I do use [credit], I pay it off at the end of the month or in a few months."
October's decline in card balances was accompanied by a 0.4 percent rise in personal income, according to the Commerce Department . However, Daco says that when you factor in the increased cost of living, wages remain stagnant and that also affects spending. "If [consumer] income is adjusted to the cost of life, it means they're not earning as much as in the prior quarter, and this is a drag on spending," says Daco.
Some consumers had also seen their credit limits cut by card issuers and so are unable to spend as much as they may have otherwise. "Credit card companies have curtailed consumers' ability to use their credit cards by reducing their allowable account balances," says Howard Dvorkin, chief executive of the nonprofit counseling and debt management company ConsolidatedCredit.org . Others have filed for bankruptcy so they may "not have the credit facilities available. There are a lot of things pressuring consumers not to spend."
A brighter Christmas?
Despite grim expectations for 2012, experts expect consumer spending will pick up significantly for the holidays.
"We're expecting holiday sales to be decent," says Daco. "Part of this increase will be due to higher prices, but part of this will be due to some underlying strength in consumer spending."
Retail sales rose 0.5 percent in October, according to the Commerce Department , and early sales reports from Black Friday and Cyber Monday reported by Thomson Reuters indicate that sales grew further in November as shoppers took advantage of steep discounts.
"When it gets to holidays, people tend to be a little bit more upbeat and willing to spend because of the season," says Moroney.
Experts say that consumers may also be anxious to spend this year after remaining in a deep spending freeze for the past several years.
"American households have been in either recession mode or recovery mode for about four years now," says Daco. "There is pent-up demand for goods that is very gradually coming out. Consumers who weren't able to purchase a fridge or a dishwashing machine or a car ... may decide that now is the time to make those purchases because their situation has improved slightly."
However, experts fear that the repressed need to spend could cause consumers to overcharge and swell their credit card balances. "There's a psychological pent-up need to shop," says Plath. "People have felt like they couldn't shop for the past four years ... I think people are just tired of not spending money and so they're blowing money on Christmas this year."
Plath predicts we could see "a temporary return to consumer patterns we saw in 2006 and 2005 where people shop ‘till they drop. Essentially, it's a little shot of nostalgia for the good old days," says Plath. However, that could lead to a painful 2012 when consumers confront their holiday debt. "Come March and April, this nostalgia will see a wake-up call from a sick economy," and consumers will once again realize that overspending in a weak economy is "not sustainable."
See related: Infographic: Shoppers looking to buy this holiday, but do so wisely
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