National Data Suggest Household Deleveraging Of Credit Card Debt

The Federal Reserve Board recently reported that consumer credit outstanding rose in October on a monthly seasonally adjusted basis. An analysis of the release by NAHB illustrated that the expansion in consumer credit outstanding in 2011 and 2012 reflected growth in auto and student loans while credit card debt fell. This decline in credit card debt outstanding had begun prior to 2011. Since peaking in the fourth quarter of 2008, credit card debt outstanding has narrowed by 29.1% and is now below its 2003 level. The initial decline in credit card debt outstanding that occurred between the fourth quarter of 2008 and the first quarter of 2010 likely resulted from credit card defaults. However, since the first quarter of 2010, the decline in credit card debt outstanding more likely reflects credit card pay-offs.

Changes in the amount of credit card debt outstanding largely reflect conditions in credit card lending. As Chart 1 below illustrates, the total amount of credit card debt outstanding expanded between 2003 and 2008. As Chart 2 shows, the 25.9% increase in the total amount of credit card debt outstanding during this time period was largely the result of an escalation in the average credit card balance per account as opposed to growth in the number of credit card accounts. Between 2003 and 2008, the average credit card balance per account rose by 25.2% while the number of accounts grew by only 0.5%.

After peaking at $866.0 billion outstanding in the fourth quarter of 2008, the amount of credit card debt outstanding fell. The decline in credit card debt outstanding coincided with a surge in the charge-off rate and a steep decline in the number of accounts. At the same time, the average account balance grew. Between the fourth quarter of 2008 and the first quarter of 2010, when the charge-off rate rose by 7.0 percentage points, the amount of credit card debt outstanding fell by 12.0% and the number of credit card accounts decreased by 18.3%. Meanwhile, the average account balance per credit card account rose by 7.7%. In the period between the fourth quarter of 2008 and the first quarter of 2010, both the increase in the charge-off rate and a decline in the number of credit card accounts more likely indicate that the contraction in credit card debt outstanding resulted from credit card defaults rather than pay-offs.

Since the first quarter of 2010 the total amount outstanding has continued its descent even as credit card default risk has returned to a historically normal level. The extended decline in the amount of credit card debt outstanding primarily reflects both a narrowing in the average balance on credit card accounts and a decline in the number of credit card accounts. Between the first quarter of 2010 and the third quarter of 2012, the total amount of credit card debt outstanding has declined by 11.6% as the charge off rate has fallen 9.4 percentage points to 3.8%. At the same time, while the number of credit card accounts has declined by 1.0%, the average balance per account has contracted by 10.7%. The steep decline in the credit card charge-off rate combined with decreases in the number of credit card accounts and the average balance per account may indicate that the contraction in total credit card debt outstanding more likely reflects households paying off-their credit card balance than defaulting.

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