Consumer Credit Down For The First Time In A Year As We Try To Pay Off Debts

While we were busy focusing on doing something that makes sense given the lessons of the recession and pay off our credit card debt, that has caused a bit of a worry for the economy. Namely, U.S. consumer credit is down for the first time in a year partly because we’ve been trying to reduce credit card debt.

Credit dropped by $3.28 billion in July, according to the Federal Reserve. A stark difference to the $9.1 billion uptick Wall Street economists had predicted in a Reuters poll. This slowdown could cause the Fed to hook up the cash IV and feed the economy some much-needed nutrition as soon as this week, notes Reuters.

And the more we worry about the economy, the less we want to ignore scary things like credit card debt, which could continue the trend of falling credit. It could also cause lenders to hesitate when choosing to give out loans or not.

“It may be the case that consumers and lenders were becoming more tentative over the summer,” analysts at Credit Suisse said in a report.

We’d been on an expanding trend since mid-2010 as consumers finally started to get out and spend again after the recession, with only minor bumps in the road. The last time credit fell was August 2011.

We’ve said it before and we’ll say it again, consumer spending makes the world go round. But if we’re all worried about paying down the debt we already have, it’s not the easiest thing to go out and spend like crazy again.

Consumer credit falls unexpectedly in July [Reuters]

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  1. Blueskylaw says:

    Since Christmas is right around the corner, we will
    soon reverse this troubling trend of debt reduction.

  2. Loias supports harsher punishments against corporations says:

    Pertinent situation I am in right now:

    My wife has about 10k in credit card debt. It’s on 4 cards with APRs ranging from 15%-23%. This was all before we married. Minimum monthly payments for all of them are about $220 with $150 going towards the interest.

    I just received 10k in inheritance, tax free.

    What do we do?

    • Loias supports harsher punishments against corporations says:

      To sweeten the pot:

      My wife is currently unemployed. She has about $3200 in savings that she is limping on while she finds a job. It’s very slow-going : – (

      • Pre-Existing Condition says:

        I’d recommend putting $6,800 of it towards savings and then put the rest towards paying down the credit cards. I’m sure there’s a strong urge to just pay down all of the debt but in doing so, you still leave yourself vulnerable if a large, emergency expense crops up, which then has to be put on credit.

      • Cor Aquilonis says:

        If I were in that situation, I would probably keep my hands on the cash until wife finds a job and monthly bills get stabilized, and let the debt wait a bit. If I could cover all monthly expenses with just my income, then I might start thinking about paying down debt before she gets a job.

        Good luck, and congratulations/I’m sorry for your loss on the inheritance.

      • AustinTXProgrammer says:

        How well do you get by on your income? That cash reserve is expensive. At the very least pay off the higher interest portions of the debt and do whatever you must to make sure you don’t run it up again. In years past I would say you have the credit cards to fall back on, but in today’s climate they might cut those limits the second you pay them off.

        Are there ways you could borrow money cheaper? I took out a car loan (basically a title loan, but from a credit union) for 2.3%… I have a rewards checking account paying 3.25%. I have to pay most of that difference to uncle sam, but it gives me a tremendous amount of liquidity at a slightly negative cost.

        • Loias supports harsher punishments against corporations says:

          My credit situation is much better – no debt save $500 on a car loan and a mortgage. The best CC rate I have is 8.99% and a lot of available credit. So we could, in theory, transfer the debt to my own card.

          We are “getting by” with one income right now, but if it continues we are going to have to bring expenses down at least a few hundred a month.

          • ConsumeristAlly says:

            I had the same question as the above poster (ATX programmer)–he’s got it right. If you can get by on one income, ditch all but a little emergency fund (say $1,000-$2,000) and put the rest–$8-9,000–on the highest-rate credit card, immediately. And, immediately (as in right NOW): tear those cards up and throw them away. You don’t ever want money at those rates.

            Normally I would advise against taking out more credit, but if you can cut your rate in half or better (not hard with 15-23% rates), then I would strongly consider his suggestion of financing a car or something SO LONG AS you put all that money on the debt immediately.

            Finally: take the Dave Ramsey course. Or another one like it. It will be well worth your time. The bigger problem here isn’t this debt; your wife needs to get wise (if she hasn’t–perhaps she has) about credit, and how evil debt is.

    • IGetsAnOpinion says:

      Call all the credit card companies and see if any will offer you a 0% rate (or other lower promotional rate) and if so, move all debt to that. If not, pay off the highest interest one, then pay more on the next highest interest one, etc etc.

    • dolemite says:

      Here’s what I’d do. Set up automatic payments on the cards. Make them pretty hard-hitting. Something like $250 a week. At the end of a month, you’ll have paid off 1k. But you’ll still have 9k in the bank from the inheritance. It’s automatic, and you’ll treat it like a bill that has to be paid. That way your debt will get hit hard every month, but you’ll still have a lot in the bank in case something happens. If she finds a job, bump it up to $350 a week or something.

      • ConsumeristAlly says:

        And if it takes a year to pay out $10,000 at 15% (which is the lowest estimate, and evens out my assumption here re: the principal being fixed), he has lost $1,500 of his $10,000 just in interest. In reality, it won’t be paid out in a year at $250-$350, so he’ll lose even more: probably well over $2,500 before it’s over, if not a full half of the $10,000. Conversely, if he slams almost all the inheritance on the debt, his net worth has increased significantly, and he can simply lay $250-$350 in the bank each month and be better off–with less risk. His cost of capital/cash is *extremely* high, so he only wants to keep the bare minimum cash for emergencies and so forth. (I’m in a similar situation, albeit at rates less than half that high.) Makes no sense to keep more than emergency cash on hand until those debts are gone.

  3. samonela says:

    It’s a sad day (IMO) when Consumers paying off their debt is considered “troubling”.

  4. msbaskx2 says:

    I’m sorry, economy. Last month, I finally paid off the last of my (upwards of $25k) debt that was slowly built up (and paid down) from raising my kids as a single parent.

  5. The Upright Man mk2 says:

    I’m only $200 away from finally being rid of my credit card for good. Feels good, man.

  6. energynotsaved says:

    I think I’d pay off the highest interest card and cut it up. I’d save the rest of the money. Good look on the job hunt.

    I’ve been working down my debt in this manner. I am down to one card, with a 14% interest. while my savings are only earning 1% or something equally silly, I don’t want to be without cash in case of emergency.

  7. BalnacedMan says:

    I just turned 27 and have $50K sitting in the bank. I own my car outright and don’t have any debt save whatever was charged to my credit card in the last month (gym payment, etc.). The rest of you are clearly doing it wrong.

    • Loias supports harsher punishments against corporations says:

      Please, please, please tell me that was snark.

      Because otherwise you are the biggest asshole on the internet. And that is saying something.

      • Coelacanth says:

        If you’re only 27 in that financial situation, I imagine that yes, personal responsibility went a very long way towards achieving that goal, but you also encountered a good deal of luck.

        Considering that so many people in their 20s are un- and under-employed, I don’t think think it’s as easy as you make it out to be, unless people are willing to make some extreme sacrifices.

        • BalnacedMan says:

          To be fair I graduated college and was unemployed for about 6 months before I made any money. I’ve saved up that amount in the last 3 1/2 years of employment.

          It does help that I earned about $50K in college scholarships but that was mainly from working excessively hard in high school to get that 4.0 and 1400+ SAT score (as well as working hard in college, about $10K of the scholarships I didn’t get until I was already in college). I do realize that not everyone had the same opportunities that I did though.

      • BalnacedMan says:

        Only the last sentence was ‘snark’. The rest is true. And I am by no means the biggest asshole on the Internet, but thanks for the compliment.

    • Snapdragon says:

      I can smell the smug from here.

    • dolemite says:

      Just be aware while much of that is hard work and determination, there’s a lot of luck that goes with that as well. The number of people that were doing fine then were laid off or diagnosed with cancer and had their 50k wiped out overnight is probably pretty high.

      • frank64 says:

        There is also some bad planning and over consumption on many who have high debt. Many will even tell you that. People always seem to look for the good luck of people who make good decisions, and look for bad luck on those that don’t. From everything I have seen luck in not the prevailing factor in most peoples lives.

  8. menty666 says:

    So it’s bad we’re knocking down our debt, but because we’re knocking down our debt the lenders don’t want to lend anymore?

    Makes sense. /s

  9. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    I’m down to $6400 on my Parent Plus loan for my daughter’s college…and at $200/month, more than the minimum, I can’t wait for the next 34 months or so to go by so it’s gone. Any extra money I can scrape together on top of that goes to savings.

    I hope no one is depending on me to start the spending spree…

  10. Coelacanth says:

    I’m hoping by February 2013, I’ll be completely debt-free.

    Worst (and most rewarding) 5 years of my life paying it off!

  11. bben says:

    Maybe we aren’t running up credit card bills because we are unemployed and can’t get credit any more. If you can’t get credit then you are not going to be contributing to the obscene bonuses of the bankers – so the federal government will just have to give them the money for those obscene bonuses from taxpayers money. So you end up paying anyway no matter what you do. Catch 22

    Dear government; the bankers are not the economy! We, the people are the economy. How well the banks are or not doing has no relevance to how we, the real economy are doing. The bank lobbyists have done a fabulous job of hoodwinking the government into thinking that if the banks are doing well, then the economy is fine. And if the bankers are making a few million less on their bonus this year, then the economy is bad.
    Hint#1 if the banks fail, it is because of poor financial management on the bankers part – so if they can’t manage their own money why should we give them taxpayer money that they keep for themselves.
    Hint#2. The banks do not give money to poor people, however, poor people DO give money to the banks – If you want to improve the economy by giving away MY tax money, give it to the poor who will spend it (mostly) on necessities and it will eventually get to the bankers anyway through things like mortgage payments, loan payments and credit card payments. While helping all of the middle men along the way. Unfortunately, the poor people cannot afford the lobbyists that the bankers can.

  12. tlvx says:

    Now this article is based on an obviously dubious statistic.

    Credit is more likely dropping because people have already used up their credit, and are not being extended any more credit by the big banks.

    Credit is more likely dropping because people have lost their jobs, and filed bankruptcy.

    Credit it certainly not dropping due to some good-will reason that has miraculously infused the entire populace with responsibility. Customers are not more tentative with spending, when they are earning, which they are not… but, banks are definitely more tentative with lending.

  13. MuleHeadJoe says:

    The article says that CREDIT is down. Credit is not debt, credit doesn’t go down if you pay down debt, only debt goes down when you pay down debt. What is actually being reported here? Shoddy reporting all around.

  14. Dirk Daring says:

    Know who needs credit cards? No one.

  15. JusticeGustine says:

    Bad news – joined the unemployed last year.
    Good news – sick time/vaca time/yada yada time wiped out half of the credit card/car loan/medical bill debt and was a seed for the snowball effect of paying off debt. Unemployment & severance paid off the rest while surviving.
    Good news – scored a middle class job.
    Bad news – new job pays 50% of what I used to make.
    Good news – without all those monthly payments, I make enough to get by.

    Burn in hell, credit cards.