According to the Federal Reserve, consumer credit card spending suffered its biggest decline in more than 30 years in February 2009. As consumers tighten their belts due to the economic crisis, job woes, and overall dampened sentiment, their reliance on plastic is likewise declining. The downtrend is outlined at the Fed’s G.19 report on consumer credit.
This report revealed that revolving credit – which is mostly entirely made up of credit cards – declined by 9.17 percent which is the biggest drop since January 1978. In total, this debt fell $955.7 billion. On the other hand, non-revolving credit actually increased by 0.2 percent. Its total is now pegged at $1.608 trillion. The non-revolving credit is composed of auto loans, mobile home loans, student loans, and other types of lending.
In total, the consumers had $2.564 trillion worth of debt in February which is a decrease from the January figure of $2.571. According to Susan Menke, a senior analyst from the Mintel International, the declining balances have nothing to do with credit card issuers because the consumers are simply “cutting back”. She explained that the industry-wide credit tightening can’t account for the dramatic decline in balances.
Dennis Moroney, a research director from TowerGroup, agrees with Menke’s statement. He said that “people are fearful” and this is contributing to their behavior. Right now, consumers are more cautions with their spending. “You don’t see them in the shopping center buying big screen TVs”. Instead, they are saving for the rainy days. Many consumers right now are afraid of losing their homes if they lose their jobs so they put a significant amount of their money aside.
But there are actually many factors that had contributed to this dramatic decline. People are saving more, consuming less, and the credit card issuers are lowering their limits. This combination is all contributes to the decline in credit card spending. Even the consumers who have high credit limits don’t use it. They are paying off their credit card balances instead because of job fears.
c, a finance professor at the University of North Carolina, said that those who are still working are paying off their debts in anticipation of future lay-offs. But the trend can later reverse when they are forced to use the plastic cards after they lose their jobs.
Despite the lower credit card spending though, it is expected that credit card balances will still grow mostly because of the consumer’s inability to make payments. The number of charge-offs (which occurs when credit card issuers realize they won’t be able to collect the debt) will increase as well. According to Menke, “society as a whole is deleveraging”.