By Mark Huffman
ConsumerAffairs.com
October 8, 2009
Brother, can you spare some credit? The answer in August was a resounding "no," as consumer credit dropped by $11.98 billion, according to the Federal Reserve.
Banks closed hundreds of thousands of credit card accounts as they sought to limit their liabilities in the face of rising default rates. For example, over the summer Chase closed thousands of accounts that had been acquired in the bank's absorption of Washington Mutual.
Consumers, meanwhile, had something to do with the decline as well, as many put away their plastic and attempted to save more money. A survey released by Consumer Reports earlier this week show that 32 percent of consumers have paid off and closed a card since January 2008, and half of those that canceled did so in direct response to the actions of credit-card issuers, such as cutting limits, hiking rates, or imposing fees.
On one hand, economists say it's a healthy sign. Consumers show signs of taking control of their finances. They are paying down debt and building up cash reserves, something businesses have also done as a response to the worst recession since the Great Depression.
On the other hand, it doesn't bode well for an economic recovery. In past recessions, it has been the consumer who has brought the U.S. economy back to prosperity with enthusiastic spending, much of it fueled by credit. As the consumer "deleverages," economists say consumer spending will likely continue to fall.
More evidence of that emerged this week in corporate earnings reports on Wall Street. On Tuesday Yum Brands, parent company of Taco Bell and Pizza Hut, reported higher profits for the third quarter, but only because of its exposure in China and other emerging markets. Sales in the U.S., the company says, remain weak.
Family Dollar, a discount chain catering to mostly low income consumers, reported profits were up 13 percent. Consumers frequenting the store, company officials note, bought the least expensive items they could find.
Boiled down, August's consumer credit numbers show consumers' use of credit dropped at an annual rate of 5.91 percent. The non-revolving credit sector, which includes installment loans for cars, boats and other big ticket items, fell at only a 1.59 percent rate, cushioned perhaps by the uptick in car sales spurred by the government's Cash for Clunkers program.
Revolving credit, which includes credit and charge cards, dropped the most - $9.91 billion - or at a 13.08 percent rate. The Fed report said that was biggest drop in six months.
