Are Consumers Falling Into Debt Trap Once Again?
Maybe consumers are feeling better about the economy. Or could it be that we are once again starting to rely on our credit cards a little too much. Some newly released figures make an argument for both sides of this debate.
Yesterday, the Federal Reserve Bank of New York released its latest Quarterly Report on Household Debt and Credit. It showed the number of open credit card accounts rose by 3 million to 386 million during the fourth quarter of 2011.
Credit account inquiries within six months, an indicator of consumer credit demand, increased 2.7 percent for the third quarter in a row.
The report also found that credit card limits rose by $98 billion or 3.6 percent in the fourth quarter of 2011, resuming the trend of increases observed in the first half of the year. This may indicate that banks are willing to take more of a financial risk with their cardholders.
The last two monthly G19 reports from the Federal Reserve show that consumers used their credit cards quite extensively to fund their holiday shopping. Revolving credit, which is made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December. It rose nearly $3 billion to $801.0 billion. This follows a jump of $5.5 billion in November which was an annual rate increase of 8.4 percent. December was the fourth straight month of increases in revolving credit.
Consumer spending is one sign of a healthy economy. However, consumers cannot afford to fall into the trap of spending more than they can afford, especially on their credit cards. If they carry a balance on their cards, the high APRs that issuers are now charging will destroy them financially. If consumers can’t pay off their entire credit card balance on time every month, then they will start to fall into that trap which helped lead to so many troubles during the recent economic recession.