Falling credit card debt hurts economy, helps lending industry

Credit card debt has been declining nearly two years running. The trend drags on economic growth, but helps credit card companies stabilize earnings and losses. Image: Thinkstock

American consumers are steadily paying off their credit card debt. The Federal Reserve reported that U.S. families cut back on credit card use for the 23rd month in a row. Overall consumer borrowing, which includes credit cards and auto loans but not home mortgages, fell at an annual rate of $3.6 billion in July — the 17th decline in the last 18 months. Paying off credit card debt is helping stabilize a lending industry suffering from an epidemic of credit card delinquency. But a prolonged slide in consumer borrowing is a drag on the U.S. economy as it struggles to recover from the Great Recession.

Credit card debt drops with consumer spending

Consumer borrowing on credit cards fell 6.3 percent in July, following a 7.5 percent drop in June. The Associated Press reports that credit card debt has declined for 23 consecutive months — a record run. As American households struggle to repair their finances, economists expect they will keep cutting back on credit card use as long as incomes and employment don’t improve and banks struggling with high loan losses maintain tight lending standards. By borrowing less and saving more, families are helping themselves but hurting the overall U.S. economy, which depends on consumer spending to expand.

Consumers held in check by banks

To minimize their losses during the economic downturn, banks have made credit cards hard to get. However, The Street reports that consumer demand for credit cards remains strong. According to a quarterly FICO survey, new credit card accounts dropped by 17.7 percent during the 12 months that ended last April compared with the previous 12 months. In the same period, credit card applications fell only 3 percent. The Street said the numbers show consumers weren’t allowed access to all the credit they sought. During that time, the total amount of credit available on all U.S. consumer credit cards fell by 12.2 percent.

Credit card companies hire more lobbyists

The decline of consumer borrowing on credit cards is actually helping credit card companies. Debtmerica Relief reports that despite new credit card rules that limit interest rate hikes and penalty fees, credit card companies are becoming more stable as consumers reign in their spending. Credit card companies such as Capital One Financial and Discover Financial Services have seen earnings and losses stabilize. As consumers pay off more credit card debt, lenders are charging off fewer delinquent accounts. This allows them to spend money that was held in reserve to counterbalance losses. They are spending 25 percent more on increased lobbying efforts to influence future changes in federal laws.