Credit Card Collapse Report

With today's post we are introducing what we expect to be a recurring report on consumer credit in the USA.

On May 7, the Federal Reserve issued its monthly report on consumer credit. Going beyond the massaged, 'seasonally adjusted' figures, there are some impressive numbers. Apparently in the first quarter of 2009, revolving credit balances - mostly credit cards - fell $60.4 billion, approximately 6%.

This means that not only are people not taking on additional credit card debt, they are paying it off at a rapid rate. If this should continue as a trend, and there are at least two reasons to expect that it will, it will have a serious dampening effect on consumer and business spending.

The first reason to expect the credit card paydown to continue is that credit card issuers are cutting credit lines right and left. Even good customers who have always paid on time are finding letters in the mail informing them their lines have been reduced or their accounts closed altogether.

The second reason is the debtors themselves are feeling less inclined to be debtors. When one's income is declining or even just less certain, all debts become onerous.

It should also be mentioned that part of the decline in debt outstanding is due to writeoffs by lending institutions. These writeoffs also erode the lenders' capacity to issue new loans.