Significant Drop in Borrowing on Credit Cards

Yesterday, the Federal Reserve reported that borrowing on credit cards in February fell at an annual rate of $7.8 billion or 9.7 percent. It is the steepest percentage decrease since 1978.

There are several reasons for this decline in borrowing on credit cards including consumers cutting back on credit card usage and paying off more of their balance; more accounts falling into default; and noticeable changes by issuers reducing available credit limits and raise interest rates.

“This drop in borrowing is certainly a reflection of consumers cutting back their spending. But I think it is also a result of changes that credit card issuers are making,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “The credit card industry is undergoing a very turbulent time and in the past six months, issuers have actively tried to find ways to cut losses, reduce their risk, increase interest rates and cut credit limits on a significant number of accounts. They seem to be working very quickly to make these changes before the new credit card reforms take place in July of 2010.”

Ask a group of friends about their credit cards. Regardless of their income and credit score, chances are fairly good that at least one of them has had a rate increase or a change in terms on their credit card, or an account closed altogether.

“These changes are widespread among issuers. You can’t make changes like these without having an impact on consumer borrowing,” says Hardekopf. “In some ways, these practices have helped sustain the freeze in the economy. The administration’s plan to stimulate consumer lending and spending has been somewhat thwarted by the issuers’ change in strategy to now cut limits and raise interest rates on credit cards.”

Take a look at the Federal Reserve’s report.

Here are some recent changes that could have an effect on credit card borrowing.

• Chase added a $10 monthly fee and increased the minimum payment from 2% to 5% for those who carry a large balance. In response to pressure from cardholders and consumer groups, Chase has canceled the monthly fee.
• Capital One increased the rates for new customers on fifteen cards. They increased the rate for the Platinum Prestige card from 7.15% to 11.9% and the rate for the No Hassle Points card (excellent credit) from 8.15% to 13.90%.
• Citi dropped the intro rate for balance transfers from 0% for 12 months to 0% for 6 months. They increased the rate for cash advances from 19.99% to 21.99% and also increased the default rate from 28.99% to 29.99%.