Consumers are using their credit cards less or paying of their balances more at an historic pace, according to the latest figures from the Federal Reserve’s monthly snapshot of borrowing trends.
And on Feb. 22, equally historic restrictions on interest rate hikes will take effect with credit card reform’s focus on protecting consumers’ outstanding balances.
Revolving credit, or credit card balances, fell $8.5 billion, or 11.7 percent, to $866 billion in December, the 15th-consecutive monthly decline, the Fed reported.
Non-revolving credit led by auto loans increased $6.8 billion, or 5.2 percent, to $1.591 trillion in December, indicating a climb in car sales.
But the overall outstanding consumer credit – not including mortgage debt – fell $1.73 billion, or .8 percent, in December to a seasonally adjusted $2.456 trillion. In November, total consumer credit fell a record $21.8 billion.
The December overall drop marks the 11th month in a row that all outstanding balances have declined – a first since the Federal Reserve began keeping track in 1943.
The historic trend – fueled by recessionary belt-tightening by consumers and simultaneous tightening of lending policies by banks – is likely to persist with the advent of credit card reform laws taking affect in two weeks.
For the first time, federal law will protect credit card users from sudden or unjustified interest rate hikes on outstanding balances, giving card holders an opportunity to further pay off their principal balances at current fixed rates as long as they pay on time.
The restrictions do not apply to variable interest rates tied to an index. Although those rates – mostly tied to the prime rate – are expected to stay near current lows.
Moreover, the Fed reported this week that banks have continued to tighten the terms of loans they make over the last few months. And demand for both business and household loans has weakened further.
“Some of this reduction in debt represents reduced demand for credit from borrowers who would like to de-leverage. However, access to credit also remains difficult, especially for households and small businesses that depend significantly on banks for financing,” said Jon D. Greenlee, the Fed’s Associate Director, Division of Banking Supervision and Regulation.
