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Credit card use increases dramatically

July 25, 2011

| Money Rates Columnist

Credit card balances increased 5 percent in May, only the second time in nearly three years that the average balance has increased. What's more, the Federal Reserve reported that revolving credit, which is almost entirely credit card debt, jumped by $3.36 billion in May after falling $876.7 million in April.

But what's it mean, if anything? Is it good news or bad news?

Taking a swipe at understanding

Depending on who you talk to, here are some ways to interpret this sudden jump:

  • Consumer confidence is back. Despite lingering high unemployment, declining wages and a still-suffering housing market, consumers are showing a new-found interest in spending again. For months they've been whittling away at their credit card debt, so why not cut loose a little bit?
  • Banks and card issuers are approving more people who apply for credit. The low rate credit cards being offered in abundance to American households are being snapped up by consumers eager to use these lower rates to pay off their higher-interest credit card debt even faster.
  • We spent more on gas. It could be as simple as that. Most of us pay for gas with our credit cards, and since the price of gas was so high, naturally our balances went up.
  • We needed to use credit cards to pay our monthly bills. That's right; it's that bad. We're not confident at all. We're treading water and plastic is the only thing keeping us afloat.

By the numbers

Overall consumer credit, which includes both revolving loans like credit cards and nonrevolving debt like car loans and student loans, increased 2.5 percent to $2.4 trillion. For eight straight months this number has been growing.

According to forbes.com, part of that growth is being driven by banks pushing people to take out student, auto, boat and trailer loans. Student loans in particular may be increasing because parents used to pay college bills with home equity loans, but now that falling housing prices have wiped out much of that equity, people are borrowing from banks to pay for school.

Another factor might be lower interest rates. Although Annual Percentage Rates (APRs) have been rising and now average is just below 15 percent, the Fed said the average interest rate on cards with balances fell from 14.48 percent to 13.10 percent. Consumers may not feel as anxious to pay down their balances when interest rates are lower.

Forbes.com also reported that those who were previously denied a credit card are now being approved when they apply for credit. Still, the Gannett News Service reported that the number of open credit card accounts has dropped 24 percent since 2008.

Despite the optimism that consumers are starting to spend again, this big increase in credit card debt makes some people nervous. The Associated Press noted that it has been 10 years since household income exceeded household debt, and AP quoted consumer advocates saying it's "time to attack debt more aggressively." AP's experts recommended limiting debt to 40 percent of gross income and limiting mortgage or rent payments to no more than 30 percent of take-home pay.

Most importantly, consumers should be wary of carrying a heavy credit card balance. Even at lower interest rates, making minimum payments means your debt could haunt you for years to come.

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