Credit Card Debt Continues to Fall

Americans reduced credit card debt for the 21st straight month in June.

The latest Federal Reserve Consumer Credit Report showed that revolving credit, which is primarily credit card debt, decreased in June at an annual rate of 6.5%. It dropped $4.5 billion for the month, and has declined nearly $150 billion since October 2008, from $976.1 billion to $826.5 billion.

This drop in credit card debt is good for consumers and issuers. Delinquency rates are dropping, indicating that consumers are paying down debts to manageable levels and reducing their risk of default. But not all of the credit can go to consumers, since issuers have minimized their risk by maintaining stringent credit card approval rates, slashing credit limits, writing off bad loans and canceling accounts.

“Paying off debt and spending less is good for personal finances. Fewer delinquencies and smarter lending practices are good for banks. However, cutting back on spending and lending is not good for the economy if they go too far and continue for too long. Lending and spending are the oxygen and water for the economy, and our economy will grow weak without a healthy supply of oxygen and water,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

The Federal Reserve is searching for new ways to stimulate lending and revive the economy. Interest rates have remained at historic lows since December 2008, but these low rates have provided little incentive for lenders or borrowers.

On Tuesday, the Fed left its key bank lending rate at zero to 0.25%, the lowest level in decades, and appears to be in no hurry to raise it. The Fed’s announcement said rates will remain “exceptionally low” for “an extended period.” This means rates on some credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low.

Ideally, the low rate encourages businesses and individuals to finance major purchases, generating momentum in the economy. However, interest rates have been at the historic low for a couple years and have not created the spark.

A low prime rate does not guarantee a low interest rate for credit cards. In August 2008, before the recession, the prime rate was 5.0% and the average credit card APR was 12.03%. Today, the prime rate is 3.25% and the average credit card APR is 13.67% according to the LowCards.com Weekly Credit Card Rate Report.

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About the Author: Bill Hardekopf

Bill Hardekopf is the CEO of LowCards.com a free, independent website that simplifies the confusion of shopping for credit cards and helps consumers easily compare cards in a variety of categories.

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