Consumer credit card balances grew by more than $5 billion in June, according to new data from the Federal Reserve, marking the first back-to-back monthly gains in three years.
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The Federal Reserve tracks the movement of credit card balances in its monthly G.19 consumer credit report. In its latest report, released Friday, the Fed said that revolving credit -- which is almost entirely credit card debt -- shot up by 8% to $798 billion, continuing an upward move that began in May.
With the gains in both May and June, credit card balances have posted their first consecutive increases since 2008, around the time the global economic recession was entering its darkest days. The June numbers also mark only the fourth increase in revolving credit in three years. Card balances are rising against an economic backdrop that has many analysts worried, as unemployment remains high and another recession appears possible.
Since the Fed doesn't comment on the consumer credit data, it's up to the experts to explain why card balances increased in June. Some analysts say banks and borrowers are both responsible for the recent rise. "You're seeing an increase in consumer credit being available and you're seeing an increase in prices," says James Rushing, a vice president in the retail practice at global management consulting firm A.T. Kearney in New York.
"Given more availability [of credit], people tend to spend more," Rushing says.
That increased borrowing wasn't limited to credit cards. In addition to revolving debt, the G.19 consumer credit report also follows changes in the levels of U.S. nonrevolving debt, which includes auto, student, mobile home, boat and trailer loans. Nonrevolving debt shot up 8% to $1.6 trillion. Taken as a whole, overall consumer credit -- revolving and nonrevolving combined -- grew by 8% as well, hitting $2.4 trillion in June. It's the ninth straight month that overall consumer debt has increased, the longest such streak since 2008.
Trend reversal The recent gains in credit card balances represent a change from the earlier trend, which saw revolving debt largely decline for over two years. Starting in September 2008 -- when revolving balances peaked at $973.6 billion -- and continuing through April 2011, moves by cardholders and banks trimmed $183 billion in revolving debt..
That long decline resulted from the combined efforts of banks and borrowers. The recession inspired banks to become more cautious as the economy soured, trimming credit lines for existing customers, charging off uncollectable debts and refusing credit to would-be borrowers with poor credit scores. Consumers, meanwhile, cut their existing debts and avoided charging purchases on plastic.
"Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times," Ezra Becker, vice president of research and consulting in credit bureau TransUnion's financial services business unit, said in a press release. According to TransUnion's analysis, consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010.
Balances riseSo why are card balances now rising? It's a matter of supply and demand, some experts say. Card issuers are again willing to lend, with banks demonstrating a "return to how they make money," A.T. Kearney's Rushing says. At the same time, he explains that certain types of consumers -- including those with higher incomes who seek out luxury goods -- are again exercising their plastic. Other cardholders may have little choice but to spend more when they go shopping. "Across the board, prices are rising," he says.
"Even as consumers cut back, they still need to spend more on what they buy," Rushing says.
Meanwhile, other experts view rising card balances as a sign of the difficult economic times. "The longer the unemployment rate remains high, I think a growing number of consumers will be doing a balancing act with their finances -- using one of their credit cards to pay off the other, covering just the minimum payment amount," Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup, says via email. If large numbers of cardholders can't maintain that balance, Moroney warns there is a danger of delinquencies on those cards, with the banks eventually being forced to charge off those accounts.
In the near term, however, card balances may continue to increase, according to analysts. Rushing expects greater credit supply and higher prices to continue "slowly" lifting revolving debt levels. "The economic news over the next week and the next month won't be positive, so it will stem some increases, but I still think [credit card debt levels] will rise," Rushing says.