American’s reduce their credit debt, but hurt the economy

U.S. families have cut back on credit card spending for the 23rd month in a row according to the Federal Reserve. Consumer borrowing dropped 6.3 percent in July and that followed a 7.5 percent drop in June. Credit cards and auto loans have fallen at an annual rate of $3.6 billion. This lull in consumer borrowing has created even more stagnation in the U.S. economy as it claws its way back from the Great Recession. Credit card companies are fairing much better as families are paying off more credit card debt then they are creating.

With employment and incomes down, U.S. families are reigning in credit card spending. This forced frugality is allowing credit card companies to become more stable as their earnings and losses equalize. As more delinquent accounts get paid off, credit card companies are able to free up cash reserves that were frozen to counterbalance losses. This is allowing credit card companies to spend 25 percent more on lobbying in Washington to change federal laws.

While the new laws are keeping credit card companies in check, it is primarily banks that have made it harder to get credit cards. A quarterly FICO survey reports that banks, in an effort to reduce losses, have contributed to a 17.7 percent decline in new credit card accounts in the past 12 months. That is with only a 3-percent decline in credit card applications. It is clear that individuals and families in the U.S. still want credit cards, but banks have tightened the purse strings. Consumers are being denied the credit they seek, with the overall credit available on U.S. credit cards falling by 12.2 percent.

It is clear that for the economy to perk up, consumer spending needs to be resuscitated, but until banks feel safe enough to get back into the mess they created and start trusting Americans with credit cards again, the economy will continue to falter. And some experts say that the best thing for the economy right now would be credit cards for everyone.

-Adam Scarano