Credit On the Rise

Credit On the Rise

The usage of all types of credit in America is on the rise, despite the economic slowdown in the US

It’s no secret that Americans love credit cards, but usage of all types of credit is growing in the US. Last year, consumers paid just 19% of their 5.4 trillion dollars worth of transactions in cash. According to Business Week Online, outstanding consumer credit adds up to nearly 100% of annual household income after taxes, up from 75% a decade ago . This means that consumers are borrowing nearly as much as they are earning. Revolving credit, which is credit that is restored as the borrower pays off what is owed, has grown over 25% since 1997 . Credit cards and home equity credit lines are the major types of revolving credit. Purchases made with credit cards account for a significant portion of this increase, and this trend has continued into the summer of 2002.

After strong spending in June, consumer credit, defined as non-mortgage consumer debt, grew 6.3% at an annual rate for the 2nd quarter of 2002. This was the largest such increase since the last quarter of 2001. Revolving credit alone, of which credit card purchases make up a significant portion, grew almost $11 billion in the second quarter, bringing the revolving credit totals of all consumers to $714.9 billion . According to Business Week Online, revolving credit is vital to keeping the economy from dipping back into recession. Though debt burden among households remains high, lower interest rates in all sectors have been keeping family balance sheets manageable. More people are choosing to transfer balances to cards with lower rates, practicing what is known as cash-out refinancing. The graph below shows the drop in credit card rates over the last 9 months:

The national averages on credit card rates are the lowest they've been in 5 years. Consumers have not yet felt the credit crunch that has been affecting the corporate world. Though it may be getting tougher for businesses to borrow money, it is still easy for a consumer to gain a new line of credit after maxing out another. If rates should rise in the near future, it will most likely be due to trepidation brought on by bad debts. The Federal Deposit Insurance Corp. estimates that the liquidation of Next Card Inc. will cost taxpayers up to $400 million, while delinquencies on non-mortgage consumer debt climbed to 1.86% of debts at the end of 2001, the highest level in a decade. Though not catastrophic, more people are defaulting on their credit card bills, and combined with the tight borrowing market for businesses, it has begun to raise some eyebrows.

On July 22nd, bank regulators unveiled new guidelines designed to increase lenders' reserves. The hope is to decrease the number of cards issued to high-risk prospects, but the fear is that such an action may cause some lenders to leave the field altogether. Americans remain credit happy, and the current credit climate on the consumer side is well suited to their needs. However, how long this climate of low rates and relatively easy approval will last is uncertain at best.