Consumer credit surged in May behind more credit card use

The rate at which consumers borrow using their credit cards has fluctuated somewhat over the past several months, and after falling in April, it spiked once again in May.

The amount consumers put on their credit cards rose significantly two months ago, climbing to a total of $870.2 billion from the $862.2 billion observed in April, according to the latest statistical release from the Federal Reserve Board. That was an increase of 11.2 percent, which followed April’s decline of 4.9 percent.

And at the same time, borrowers continued to increase the rate at which they took out nonrevolving credit, the report said. This kind of borrowing refers to installment loans, such as those for auto or federal education financing, but not including mortgages. This type of borrowing increased 6.5 percent overall to a total of more than $1.7 trillion, up from slightly more than $1.69 trillion in April. Consumer borrowing on nonrevolving loans has been increasing for some time now and stands significantly higher than it did even at the end of last year, when it stood at slightly more than $1.64 trillion.

As a consequence of these two increases, total consumer credit rose 8 percent, the largest single-month increase seen in some time, the report said. In all, consumers owe a total of more than $2.57 trillion, an increase from nearly $2.56 trillion the month prior, which itself was a jump of 9.6 percent.

A closer look at the numbers

A large and expanding area for nonrevolving borrowing is in federal student loans, on which consumers now owe $464.9 billion, the report said. That’s up from just $417.4 billion at the end of last year and $308.8 billion in 2010.

Meanwhile, credit card balances have continued growing as well, largely as consumers continue to feel better about their personal finances and ability to handle more debt in the wake of the recession, the report said. Nonetheless, growth has been extremely slow in this area, even despite May’s sharp increase, and still stands at more than $50 billion below 2009’s level of $921.9 billion, which itself was down from the all-time high.

At the same time, lenders are also making it more affordable to tap this type of credit, the report said. The average interest rates on credit card accounts nationwide slipped to 12.06 percent in May, down from the 12.34 seen at the end of the first quarter, the last period for which data was available, as well as the 12.36 percent at the end of last year. Rates haven’t been anywhere near this low since 2008, at which time the average interest rate on all credit cards was just 12.08 percent. Further, credit card accounts assessed interest saw their rates fall 12.76 percent from 13.04 percent at the end of March, and is now more in line with the 12.78 percent seen at the end of last year.

Further, rates also slumped for the average 48-month new car loan, the report said. Financing for this type of loan was available at just 4.87 percent, down from 5.07 percent at the end of the first quarter and 5.4 percent in 2011. It was the lowest level observed on this type of loan by far since 2007.

Are consumers borrowing more?

Experts have long predicted that consumers would start borrowing more heavily on their credit cards once again, and have now done so for much of the year despite the slowing economic indicators that used to be linked closely to issues like credit card repayment rates, such as unemployment. Despite joblessness still hovering near 8 percent and wages remaining relatively stagnant, consumers have generally shown a greater interest in taking on loans and carrying balances from one month to the next.

This may be part of the reason that experts further believe that instances of delinquency and default on consumer credit cards will bottom out at some point in the near future, and begin climbing again. This trend has been predicted for some time but has yet to come to fruition, as consumers have remained conscientious in their efforts to make their credit card bill payments on time and in full since the end of the recession.

What some borrowers may not realize is that when experts talk about how to raise your credit score, simply making all payments on time and committing to keeping balances as low as possible are perhaps the two simplest and best methods for doing so. These two factors alone make up 65 percent of a borrower’s overall credit rating, and therefore those who have taken a hit to their credit ratings in recent years can begin rebuilding it by just sticking to common sense efforts.

Posted in Finance
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