Some Debt Trends Are Good. This Isn’t One of Them.
AMERICAN credit card debt is growing at the fastest rate in years, a fact that may signal coming trouble for the banks that issue them.The Federal Reserve reported this week that the amount of revolving consumer credit that is outstanding hit $937.5 billion in November, seasonally adjusted, up 7.4 percent from a year earlier.
The annual growth rate has now been over 7 percent for three months running, the first such stretch since 2001, when a recession was driving up borrowing by hard-pressed consumers.
The surge in credit card borrowing comes as credit card default rates are gradually rising, albeit from low levels, and may reflect the fact that it has become harder for consumers to borrow against the value of their homes, both because home values have fallen in many markets and because mortgage lending standards have tightened.
“We believe that credit card performance will noticeably deteriorate during the year,” Fitch Ratings said in a report this week, “given spillover from residential mortgages, weaker economic trends and higher levels of unemployment.”
One of the largest credit card issuers in the country, Capital One, warned that its profits would be lower than expected, in part because of rising credit card delinquencies.
Increases in outstanding credit card debt can indicate a strong economy, as confident consumers spend more, or it can indicate the opposite, as troubled consumers find it harder to pay their bills. The fact that the November increases in credit card debt came during what appears to have been a weak holiday shopping season could be an indication of the latter.
The figures in the accompanying charts are based on seasonally adjusted figures. Before such adjustments, credit card balances always build up in November and December as holiday purchases are made, and then fall in January and February. A smaller-than-normal increase in December, when the figures are reported next month, may be expected from the reports of poor sales from chain stores.
If the increase in outstanding debt is a normal one, that could indicate that payments slowed because consumers are having trouble making ends meet. The same would be true if the declines in January and February are smaller than usual.
A turnaround in trends for home equity loans could also be a sign of consumer worries. In the spring, as credit tightened, the amount of outstanding home equity loans fell and credit card debt rose. That could indicate that consumers turned to credit cards when new loans were no longer being approved.
But the amount of outstanding home equity loans bottomed out in April, and over the past six months is up 5 percent.
That increase may reflect the nature of home equity loans, which typically give consumers the right to borrow up to a certain amount of money. It seems likely that the latest increases reflect borrowing by consumers with pre-existing lines of credit that they are now tapping, rather than newly approved loans.
The holiday sales data indicated that consumers cut back in late 2007. But the consumer credit numbers would seem to indicate that they wound up further in debt anyway. Those are not good signs for the economy as 2008 begins.
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