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Consumer Credit Levels Reach Their Lowest Point in over a Year

posted by Nathalie Martin

According to a recent Reuters story, consumers are reluctant to hold debt due to the U.S. Credit rating downgrade and debt problems in Europe. The economy is shaky so people are apparently less willing to carry tons of debt. Consumer credit fell $9.50 billion in August after rising $11.92 billion in July, the report said, which is well below economists’ expectations of a $7.75 billion increase.

Revolving credit, which mostly measures credit card use, dropped $2.27 billion in August after falling $3.56 billion in July. Non-revolving credit, which includes mostly auto loans, fell $7.23 billion, the largest decline since August 2008, after rising $15.48 billion in July.
"Consumers are extraordinarily sensitive to economic conditions and as things started to look a bit more sour, they stopped using their credit card," said Steve Blitz, a senior economist with ITG Investment Research in New York. While this story paints this as a bad thing for the economy as a whole, it speaks well of consumers’ efforts to protect themselves in this economy.



I doubt the US credit rating or European debt crisis have anything to do with whether consumers borrow with credit cards. Most consumers look at their own financial situation along with the relative terms of credit cards and other debt.

Up until around Sept 2008 a typical credit card offer was 4% until paid off on balance transfers (with some as low as 2%). Since it's not hard to convert new borrowing into a "balance transfer", it's easy to borrow a lot of money at a very low rate for a long time.

Today teaser rate offers are for a period of 4 months to 2 years, after which they balloon. The exception I recently received was 8% until paid off, still rather high.

Thus it's much more expensive to borrow new money today, so debt is being gradually paid off. The cheap money today is in a new mortgage (if one qualifies) or a car loan.

I don't think there's any reason to invoke international finance to explain the reduction in credit card debt. In fact, the Reuters claim is contrary to the "look how ignorant Americans are" polls which say that most people don't even know what what a Euro is, let alone that it's in crisis.

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