Credit Card Debt At A 10-Year Low; Slow Revival Seen

Investor's Business Daily

Credit card debt is poised to rebound off its 10-year low, but consumers may not return quickly to their old, debt-fueled buying habits.

While historic borrowing and spending patterns should resume eventually, stagnant incomes are holding them back, said Greg McBride, senior financial analyst for

"It's not like the American consumer has gotten religion about paying down debt and saving," he said.

In fact, a recent study from the Boston Federal Reserve estimates at least 60%-70% of the recent decline in mortgage debt is attributable to foreclosures, belying the deleveraging narrative of renewed frugality.

The paper also suggests households may have even underspent relative to their income and net worth before the recession and have been overspending since.

Visa (NYSE:V) and MasterCard (MA), which don't carry card balances but make money off transaction fees, reported earnings last month with international volume growth outstripping U.S. growth.

American Express (AXP), which does carry loan balances, has seen the total fall 73% from the peak in early 2010. Purchase volumes on Bank of America's (BAC) credit cards have declined in recent quarters, while debit card purchases are up.

Plastic WrapU.S. credit card debt hit a decade low of $672 billion in Q2, down 22% from its peak of $866 billion in late 2008, according to New York Federal Reserve data.

The number of credit card accounts has risen slightly since collapsing after the recession, but is still comparable to levels seen in late 1999 and early 2000.

There are signs credit cards are coming back. Outstanding revolving credit has had a slight uptick in recent months. Other types of borrowing, like auto loans, are up too. But soaring student loan debt makes it harder for young people to get other forms of credit.

Some consumers have indeed turned more frugal, but the deleveraging of credit card debt is mostly the result of banks tightening standards, said Gil Luria, an analyst at Wedbush Securities.

"There are a lot of people that banks no longer find worthy of consumer credit," he said.

People with low credit scores have been largely shut out of the card market, in part by new regulations that limit fees. But the pendulum is ready to swing in the other direction.

Consumers as a group appear to be done deleveraging, and those who still have access to credit are slowly ramping up debt as their incomes gradually improve, he said.

Delinquency rates on credit cards are at four-year lows. Overall household debt payments as a share of disposable personal income fell to 10.69% in Q2 from 10.81% in Q1. That's the lowest rate since late 1993.

Still, the debt bust's residual hangover has yet to completely disappear. Growth in the average dollar value of third-party collections has accelerated in the past year, even as the share of consumers in collection status has been mostly steady during that time.

Lenders eventually will have to extend more credit to generate faster growth in their businesses, McBride said.

But card companies like AmEx are now looking to prepaid cards targeted at lower-income people without bank accounts to drive up volume on their payment networks.

Until incomes pick up more, people can't lean on the "crutch of credit," he said. "That's why consumer spending and the economy are stuck in first gear."

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