Credit Card Spending Drops Before the Holidays

Americans curtailed their credit card spending in the third quarter, according to the latest consumer credit report from the Federal Reserve.

Overall, outstanding consumer credit increased at an annual rate of 5.2% in the third quarter, no thanks to credit cardholders. Revolving account balances — credit that can be re-used after it is repaid, as with credit cards — declined at an annual rate of 2.2% last quarter after consistent cutbacks in July, August and September. Before that, revolving loan account balances had been growing.

Samuel Rines, an economist and equity analyst for Chilton Capital Management in Texas, called it a shift in wallet spending, in which consumers put their money toward buying homes and goods such as vehicles and furniture, as opposed to things they’d pay for with their credit cards.

Revolving balances went from $851.6 billion in the second quarter to $846.9 billion last quarter, while non-revolving balances — including those of auto, student and personal loans, as well as mortgages — jumped from $2.16 trillion to $2.2 trillion. That contributed to the overall credit balance increase from $3.01 trillion in the second quarter to $3.05 trillion in the third quarter. That’s up from the second quarter of 2012, when outstanding consumer credit was $2.88 trillion.

What This Means for the Economy

While the shift from revolving to non-revolving credit isn’t necessarily bad, the changes in growth have implications for the economy.

“Revolving credit is typically a good sign of consumer demand,” Rines said. “You don’t have consumption driving inflation, but you don’t have consumption driving the need for jobs to be created. Really what this told me was we don’t have a lot of high-powered credit that drives the economy.”

Consumers tend to spend the most on credit cards in December, August and November, but the data are seasonally adjusted, and revolving credit declined at an annual rate of 1.2% in August (an improvement over the 2.6% decline in July). Rines said October may be worse than September’s decline of 2.9%, given the government shutdown and related furloughs, but things should bounce back in November and December. Still, with the seasonal adjustments, the annual growth rate of revolving credit will likely remain negative at the end of the year.

“A lot of it has to do with consumer confidence,” Rines said. “You’re probably looking at a flat number in Q4 because you’re looking at another debt ceiling debate, and those are the big issues that keep wallets shut.”

In addition to the notable trend in revolving credit, the report showed continued growth of student loan debt: The nation surpassed $1.2 trillion in outstanding student loans in the third quarter, up from $1.18 trillion in the second quarter.

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