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Credit card spending jumps dramatically

September 29, 2011

| Money Rates Columnist

We're doing a better job making our credit card payments--at least according to the declining number of accounts that credit card companies are writing off as uncollectible.

But will that last?

While the Wall Street Journal and American Banker magazine reported that the trend of decreasing write-offs--known as "charge-offs" in the banking industry--is expected to continue declining into 2012, the Federal Reserve reported that consumers are starting to rack up some staggering credit card debt.

According to a recent consumer credit report from the Fed, a drop in credit card debt in July was preceded by a buying binge between April and June of 2011. During that quarter, U.S. cardholders added $18.4 billion to their credit cards--a 66 percent increase over the same period last year and a pace that will leave us with $54 billion more in credit card debt at the end of 2011 that we had at the end of 2010, according to dailyfinance.com.

The Fed determines the amount of debt by tracking consumer credit card spending on cards like gas credit cards and factoring in the amount card companies wipe off the books when accounts are seriously delinquent and aren't likely to be repaid.

The spending pace during the second quarter is nearly 400 percent higher than it was in early 2009, when American consumers came to grips with the recession and focused less on spending and more on paying off their debts. Fed reports show that credit card debt has been dropping during the first quarters of the last two years, but that those reductions are usually eclipsed by spending later in the year.

But this year's eclipse has been especially pronounced, with consumers spending at a rate reminiscent of pre-recession years when consumers enjoyed higher incomes, easier routes to credit and stronger home values.

The latest Fed report also noted that the brisk pace of credit card spending abated somewhat in July, the first month of the third quarter, as credit card spending dropped $3.44 billion.

The spate of spending on credit is open to many interpretations, including:

  • Consumers are confident again in their jobs and the economy and feel they can cut loose a little bit. This, however, flies in the face of surveys showing consumer confidence in the economy is actually quite low.
  • People, particularly the unemployed, are resorting to using their credit cards to buy everyday essentials, like groceries, or to continue making house payments.
  • Much of the increased credit card debt is being eaten up by higher prices for commodities such as gas.

In any case, the decline in the charge-off rate is good news for credit card companies, who for three years have been steadily weeding out the "weak borrowers" who can't make their credit card payments. At the same time, card companies have not been approving as many credit card applications as they have in the past, ensuring that only the most reliable consumers are granted plastic privileges.

As a result, the Wall Street Journal reported that the credit card delinquency rate, which measures accounts that are more than 30 days late, has been declining the last two years. The August delinquency rate of 3.04 percent was half of what it was at its peak in October 2009.


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