For the 17th consecutive month, U.S. consumer use of revolving credit has declined, according to a report released in April by the Federal Reserve.
Revolving credit is primarily credit card usage. It fell in February at an annual rate of 13.1 percent. The current total of $858.1 billion in revolving credit represents a $100 billion decrease since the fourth quarter of 2008.
“Consumers seem to be taking some steps to reduce their credit card debt—some of it out of necessity, some voluntarily. They are using cash and debit cards more often and charging less on their credit card, possibly due to the APR [annual percentage rate] increases they have seen. But significant actions by the issuers have also contributed to this decrease,” said Bill Hardekopf, CEO of LowCards.com, which helps consumers compare credit cards, and author of The Credit Card Guidebook.
Use More Cash
Hardekopf noted nearly 42 percent of U.S. consumers are using more cash than they were a year ago, according to a survey by the consulting firm Market Strategies International. In a study by BIG Research in January, 30.5 percent of respondents said they would pay with cash more often, up from 23 percent a year earlier.
Hardekopf said the news of the decline is good but people should keep it in perspective.
“If we’ve gone down $100 billion in a year and a quarter, that’s still only 10 percent,” he said. “So it’s not like we’ve cut this debt in half. The total amount [of revolving credit] was outrageously high, and it still is. I think this is a great step and a good sign. Seventeen consecutive months of drops is to be commended, but [revolving credit] still totals $858 billion.”
Hardekopf said one reason for the decline could be psychological.
‘Downturn Took Toll’
“The economic downturn took a tremendous toll on us all. I’ve been wondering, ‘Gosh, could this be a shift in purchasing patterns?'” he said. “Maybe consumers have gotten more conservative because they were burned. They had spent too much. Maybe they’re getting back to the ways of their grandparents, where they would buy only what they could afford. That’s not a bad thing.”
Other factors include the actions of credit card issuers.
“To protect themselves from future risk, issuers have closed accounts, cut the credit limits on millions of customers, and have become much more selective on which customers receive approval on a credit card,” said Hardekopf.
There are signs the steps might be working. Bank card defaults fell to 4.39 percent in the fourth quarter, from 4.77 percent in the prior quarter, according to a report released in April by the American Bankers Association.
Chase Will Cut Customers
In a recent letter to shareholders, JP Morgan Chase CEO Jamie Dimon wrote, “the industry as a whole reduced limits from a peak of $4.7 trillion to $3.3 trillion.” He added that to reduce risk in the future, Chase will stop offering credit cards to about 15 percent of its current customers.
Another factor probably is higher costs to use credit cards, according to Hardekopf.
“The financial penalty, also called the APR or annual percentage rate, has gone up and up. It’s close to 2 percentage points higher [on average] than it was a year or so ago. So that’s had a big impact because people are trying to hold down their costs.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.
Jamie Dimon’s letter to JP Morgan Chase shareholders:
Federal Reserve Consumer Credit statistics: