While consumers may be more open to using their credit cards than they have been in the recent past, it appears they're still relying on the cards they've already got in their wallets, rather than applying for new ones, according to data released Tuesday by the Federal Reserve Bank of New York.
The bank's quarterly report on household debt and credit, released Nov. 27, showed consumers' credit card balances rose by around $2 billion to approximately $674 billion in the third quarter of 2012 after tumbling to their lowest levels in 10 years the previous quarter.
The growth in credit card debt didn't translate into an expansion in new credit, however. The number of open credit card accounts fell for the second quarter in a row, underscoring the fact that although consumers are more comfortable with carrying higher levels of card debt, they're less interested in being able to borrow more than their current credit limits allow. Credit inquiries -- which measure how often consumers apply for additional credit -- also fell for the third consecutive quarter, according to the report.
Despite the weak demand for new credit, overall consumer credit, excluding mortgages, jumped 2.3 percent in August. The third quarter's significant growth in consumer debt was driven in part by a spike in student loan debt. However, auto loans -- which rose to their highest levels in almost four years -- and credit card debt also played a noteworthy role, said the Fed.
Healthier consumers, stronger spending
Experts say that consumers appear to have gained significant control over their finances after a rocky decade in which the debts they owed was far more than they could pay. Mortgage debt fell considerably in the third quarter of 2012 to its lowest level in six years, according to the report, while delinquencies also fell.
"Consumers have really benefited from low interest rates in the process of deleveraging ," says Keith Leggett, a senior economist at the American Bankers Association. "That is allowing them to better manage their finances."
Consumers also appear to be far more optimistic about their personal finances than they have been in the recent past, particularly as the job market slowly improves and the housing market continues to pick up. The number of people applying for new mortgages, for example, rose significantly in the third quarter, with mortgage originations increasing to $521 billion.
Experts say that the strengthening housing market is especially good news for economic growth since it means consumers are feeling more confident about their ability to take on debt and are likely to spend at least some of their income on new furniture and other household goods.
"The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position," said Donghoon Lee, senior economist at the New York Fed in a press release accompanying the report. "As consumers feel more comfortable, they may start to make purchases that were delayed."
Already, consumers have begun replacing worn-out household items. The third quarter's modest uptick in credit card debt corresponded with a significant increase in the number of people that bought durable goods, such as household appliances, over the summer.
After laying low for much of the year, consumers seem to be letting loose a little, says Don Dutkowsky, a professor of economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University, and have begun spending on goods they don't necessarily need.
That's a good sign that they're feeling more confident, he says. "Durable goods are the kind of goods you can do without," says Dutkowsky.
Often, during a recession, consumers put off replacing big ticket items, such as a worn-out washing machine, until they feel more confident about spending. So "one of the signs of recovery here is, OK, their households are in more efficient shape and maybe the job market has slowly gotten better and so they released the throttle a little bit," says Dutkowsky, and replaced those aging items. That said, Dutkowsky says consumers overall are still being very cautious. Consumer spending on durables is up, but it's still very low by historical standards.
The ABA's Keith Leggett also cautions that gas prices were significantly higher toward the end of the third quarter, squeezing consumers' ability to pay for things in cash. "Therefore, people may have incurred credit card bills because it was costing more to fill up the tank of gas," he says.
Inside the report
Every quarter, the Federal Reserve analyzes approximately 40 million consumer credit reports and looks at how people are using credit during that time.
Some of the highlights of this quarter's report include:
- Demand for credit in the third quarter of 2012 was notably weak. The number of consumers who applied for additional credit in the past six months fell for the third quarter in a row. Credit inquiries fell to 167 million in the third quarter of 2012, down from 168 million in the previous quarter.
- Growth in new credit was also lackluster. The number of open credit card accounts fell by 1 million customers in the third quarter of 2012, while existing credit card limits remained flat.
- Consumers appear to be getting a better grip on their finances. Bankruptcies dropped by 16.3 percent in the third quarter, while overall delinquencies remained relatively flat.
- Consumers are charging more to their cards. Credit card balances increased by about $2 billion in the third quarter, after dropping by $7 billion in the spring.
Experts say that recent trends in consumer spending have been a positive sign for the economic recovery. However, many consumers still aren't done shedding the debt they've got and so growth will remain relatively slow for some time.
"I think we probably have another year or two to go" before consumers are done paying down their heavy debt loads, says the ABA's Leggett. "We didn't get there overnight with regard to building up household debt. It's going to take time for households to right-size their balance sheets."
Consumers are also facing a substantial drop in their disposable income at the beginning of the year if lawmakers don't come to an agreement about how to stop the automatic series of spending cuts and tax hikes that are scheduled for Jan. 1. That, in turn, could cause consumer spending to reverse significantly, say experts, and prompt consumers to retrench.
Even the debates going on now about the fiscal cliff could have a substantial impact on consumer confidence, experts say. "One of the things we remember from July and August 2011 was when this whole debate about raising the debt ceiling dominated the airwaves, it really caused consumer confidence to crash," says Leggett. It's possible that if lawmakers continue to be unable to work together, that may significantly erode consumers' optimism, he says.
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