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Credit card debt jumps 5%

The remarkable monthly increase seems to reverse a 3-year trend, as card companies loosen standards and troll for new customers.

By MSN Money Partner Jul 15, 2011 3:44PM

This post comes from Jeremy M. Simon at partner site CreditCards.com.

 

Consumer credit card balances saw their biggest percentage jump in nearly three years -- going up more than 5%, according to data released today by the Federal Reserve.

Revolving credit, nearly all of which is credit card debt, rose $3 billion to $793 billion, according to the Fed's monthly consumer credit report. The 5.1% jump is the biggest since June of 2008.


That's out of character for normally debt-shy borrowers: With the exception of a monthly increase in December 2010, credit card balances have dropped consistently for more than two years. Previous reports had shown that consumer credit card debt had also increased in March 2011 -- by a slight 0.1%. However, the Fed revised that number down in this month's report, showing a decrease of 0.5%. That makes this month's increase only the second in 33 months.

Some of the increase appears to be the result of banks relaxing their lending approach. "Broadly speaking, we're starting to see a little bit more traction in terms of the issuers trying to go out and get new customers," says Sanjay Sakhrani, an analyst with investment bank Keefe Bruyette & Woods in New York.

 

Still, since the Fed provides no commentary along with its report, it can be tough to know exactly what factors caused the increase in card debt. And consumer credit data is often revised following its initial release -- as we saw with March's number. That means that May's increase could go higher or lower when the Fed releases data next month. Post continues after video.

Along with credit card balances, the Fed's monthly G.19 consumer credit report also tracks nonrevolving debt, which includes auto, student, mobile home, boat and trailer loans. Overall consumer credit -- revolving and nonrevolving added together -- rose 2.5% to $2.4 trillion in May. It's the eighth straight month that overall consumer debt has increased, the longest such streak since 2008. Meanwhile, nonrevolving debt also rose, jumping 1.3% to $1.6 trillion.

 

This month's report also included information on consumer credit card interest rates. According to the Fed, the average rate on credit cards assessed interest -- in other words, currently held cards that carry a balance from month to month -- fell to 13.10% in May from 14.48% a year earlier.

 

Analysts say that may be a result of cardholders doing a better job of repaying their card issuers. "The risk profiles of their card portfolios have been gradually improving over the last few years -- that is probably a lot of it," says Susan Menke, behavioral economist for Mintel Comperemedia, which tracks direct marketing offers. (Estimate your credit score for free.)

 

The drop in annual percentage rates on existing accounts that carry balances stands in sharp contrast to what has been happening with interest rates on new credit card offers. According to the CreditCards.com Weekly Rate Report, new card APRs are the highest they've been since 2007, at 14.91%.

 

A break from the norm
Eliminating credit card debt, both by borrowing less from banks and repaying what they had already borrowed, had become the norm for consumers. From September 2008 -- when consumer credit card balances hit a peak of $973.6 billion -- to April 2011, revolving debt plunged by more than $180 billion.

 

And the job market continues to give Americans good reason to be cautious: The latest jobs data showed that unemployment rose to 9.2% in June, the highest level since December 2010. When consumers aren't certain they can depend on their next paycheck, it tends to discourage them from borrowing money.

 

During the recession, lenders pulled back, cutting account holders' existing lines of credit and denying new credit to applicants with poor credit scores. Banks also charged off unpaid debt they assumed would never be repaid. Analysts say those efforts have played a role in cutting revolving debt levels.

 

"The charge-off rates have been very high and that's reducing loans outstanding," says Sakhrani. That's because charging off balances eliminates them from the pool of revolving debt considered by the Fed.

 

According to the American Bankers Association trade group, bank card delinquencies (or late payments 30 days or more overdue) increased to 3.40% of all accounts in the first quarter of 2011. That's well below the 15-year average of 3.95%, but the increase is a sign that consumers are still struggling.

 

"With a slow-growing economy and weak job growth, there will continue to be financial stress that will make it hard for some people to pay their bills on time." ABA chief economist James Chessen said in a press release.

 

However, other data paint a rosier picture. Moody's Investors Service says the credit card charge-off rate fell to 6.95% in May from 7.16% in April, as the delinquency rate declined to 3.30%, just shy of the historical low as tracked by Moody's.

 

Some experts say the decline in charge-offs is helping spur a rebound in card balances. Although revolving debt levels had previously been dropping, "the fact that there's less charge-offs helps it go the other way," Sakhrani says.

 

More card use ahead?
Additional data show that while May sales at U.S. retailers declined 0.2%, when a major slump in auto sales was excluded, retail sales rose 0.3%.

 

As a result, some experts say more gains in card balances are coming.

 

Moody's says data from credit bureau Equifax indicate that more consumers -- not just those with the best credit scores -- are now being offered credit. Equifax data "suggest that issuers have started going down-market again, although standards are still tighter than they were before the recession," Moody's said in its Credit Card Statement report on June 21.

 

Other experts agree that overall credit -- revolving and nonrevolving -- will continue their gains. Among them is Michael Niemira, chief economist for the International Council of Shopping Centers.

 

"The consumer credit cycle really has turned the corner, and I think it will be up in June to continue the upward momentum," Niemira says in an email.

More on CreditCards.com and MSN Money:

7Comments
Jul 16, 2011 7:45AM
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I have said this before if you do not have the cash you do not need to buy an item and you do not need to( KEEP UP WITH THE JONES ) they are broke.
Jul 17, 2011 2:09AM
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I had a major Credit card for 12 years and used it and paid it off each month, last year they canceled my account, so I applied for a credit card at My credit Union at less than half the interest rate, since then I have received  twenty applications from My old credit card company for a card at three times the rate of My credit Union good luck to them I hope they lose all their customers that's what they get for treating good customers like crap.
Jul 15, 2011 5:24PM
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Ok so they blocked my original post saying that it looks like spam.  What ever. 

 

Try this, Pay off credit cards, everything has gone up, wiped savings out trying to keep up, blow engine in car, vermin found under house and destroyed wood, nothing left and no cost of living allowance in 7 years.  Plastic comes out just to get to work (engine) and to fix house (vermin).

Maybe this will make it through to post.  Not as elegant as prior writing.

Jul 17, 2011 8:43PM
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I can't help but wonder if the increase suddenly is due to people just trying to buy groceries and gas?  With unemployment so high for so long some folks might be at the end of their benefits and now are resorting to credit cards just to live.  I don't take the increase as a good sign especially since retail is so low- obviously people aren't buying "stuff" but perhaps necessities? 
Jul 18, 2011 10:42AM
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Great news for the banks. Even with a four percent default rate. Banks pay one to two percent on savings accounts. Charge eighteen percent on average, for credit card debt. Net gain for the banks is about twelve percent on credit card debt. Thank you Ben Bernanke, Fed reserve chairman, for helping the banks, do very well, while the middle and lower class, are suffering though this bad economy.  Bernanke, just another example of our Govt. being against the people, rather than for the people.

Jul 18, 2011 8:15AM
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Yeah I'm with kab not good captain the ship sustained damage. Look what's going on in europe maybe double dip. Pay off your debt! next recession will be true bottom. Then we can start to grow again.
Jul 15, 2011 9:04PM
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Some people never learn. You'll never retire confortably if people continue to run up credit card debt.  Many people hate the banks, but who do you think extends you credit to live a life style you can't afford.  Yes, credit cards are nice, I charge everything and get 1-5% cash back every month and I pay the balance in full each month,  what a great way to screw the banks.  Their not getting 23-27% interest off of me.  And BTW I have 23-27% each year to buy more toys.
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