Consumers Borrowed More in July, Just Not With Credit Cards

By Christopher Maag

American consumers borrowed a lot more money in July, even as they took big steps toward paying off their credit cards, according to a recent report by the Federal Reserve.Total consumer debt increased by almost $12 billion during the month, but credit card balances dropped by $3 billion.

The big reason for this apparent schizophrenia? Car sales. Sales figures across the country were strong in July, according to the Fed’s Beige Book report, with fuel-efficient cars flying off dealership lots in Cleveland and Kansas City, and luxury cars selling well in Minneapolis.

[Article: Confessions of a Former Credit Card-a-holic]

Most car dealers don’t accept credit cards. But just because consumers need cars to get to work doesn’t mean they’re feeling any better about their own debt, or state of the overall economy.

“Even taking into account the many financial pressures they face, households seem exceptionally cautious,” Fed Chairman Ben Bernanke said in a speech on Thursday in Minneapolis. “Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.”

That continued pessimism about their financial futures may have caused Americans to focus on continuing to pay down their credit cards in July. Since reaching a high of $972 billion in mid-2008, credit card debt has been in a steep decline. That drop-off was interrupted in May and June of this year, when credit card balances crept back up

But consumers returned to their previous behaviour in July, cutting their credit card balances by 5%. That’s a significant decrease, especially for a single month. Credit card debt plummeted by 10% in the third quarter of 2010; it fell 9.6% during all of 2009.

Such sustained cost-cutting over such a prolonged period of time is just not normal, Bernanke says.

“One striking aspect of the recovery is the unusual weakness in household spending,” the Fed chief said in Minneapolis.

That weakness can be attributed to continued high unemployment, wage stagnation and lower home values, the Fed says.

[Resource: Get your free Credit Report Card]

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