Credit card use muffled while car loans pick up in February

The the Federal Reserve; Jane Yu/MEDILL

Consumers took on more credit to buy cars in February, more than offsetting a continued drop in credit card spending.

Consumer credit outstanding rose for a fifth straight month, up $7.6 billion to $2.42 trillion from January’s $2.412 trillion, according to the Federal Reserve.

The $7.6 billion-rise handily beat the average estimate of economists as compiled by Bloomberg LP that consumer credit would expand by $4.6 billion.

Non-revolving credit, a category usually for car loans or student loans, increased $10.3 billion to $1.63 trillion, while revolving credit, which generally reflects credit card usage, declined by $2.7 billion to $794 billion.

“When you look at the consumer credit data in aggregate, it is correlating well with the changes in the economy,” said Rick MacDonald, director of research and analysis at Action Economics LLC. The Colorado firm had estimated an increase of $4 billion.

“The market has been underestimating the growth for the better part of the year,” said Christopher Low, chief economist at FTN Financial, who had estimated that the change would be $2 billion.

Low pointed out that the area of growth was in non-revolving debt, which is composed mostly of car loans. He added that “it is unusual to see this kind of weakness in revolving debt,” which has been steadily falling. He attributed this to “the tighter standards imposed by Dodd-Frank, where there is a whole group of people who have lost access to revolving credit.”

With the Dodd-Frank Act, limits are imposed on the fees a financial institution can charge customers when they fail to pay. The higher risk of default has “tilted profit to loss on a whole group of borrowers at the low end of the credit spectrum,” according to Low. “In the long run, it’s probably a good thing; but in the short run, it’s pretty painful.”

MacDonald of Action Economics added, “You’re seeing a reflection of the hangover of what we’ve had in the previous years,” explaining that personal spending has most likely been dampened. The dwindling credit use reflected in the revolving debt figures might be a sign of the “deleveraging that is going on in households, some more discipline.”

Overall, a sign of return to consumer credit use, he said, is a “confirmation of economic growth.”

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