In a sign that the recession has discouraged Americans from spending money they don't have, Americans paid down their credit cards and borrowed less in May, according to the Federal Reserve. It was the fourth straight monthly decline for consumer debt, and the 18th drop in 20 months. Consumer credit, including auto, personal, and student loans, as well as other forms of borrowing, fell by 4.5 percent, and revolving debt — mainly credit cards — plummeted by 10.5 percent, as people paid down the balances on their cards. Is this a sign that the nation's financial health is improving, or will consumers' reluctance to spend with plastic derail the recovery? (Watch a Bloomberg discussion of the credit crisis)
This is nothing to celebrate: The headlines "sound reassuring," say the editors of Financial News USA, but the main reason "credit-card balances are declining isn't that people are paying them off with their spare cash and extra earnings," it's that "banks have been writing them off as the borrowers default." And people are so desperate they're letting their mortgages go delinquent while making sure they make the minimum payment on their credit card, so they'll have it as a financial "lifeline" — that's hardly a sign of renewed fiscal health.
"Credit-card debt: It's worse than it looks"
This is good for our long-term financial health: In some ways, it's good that consumers are paying off their debts, says David Indiviglio in The Atlantic, although it may be true that "the $166 billion decline in total consumer debt we've seen since July 2008 could have gone a long way in stimulating the economy and creating additional jobs." But the "silver lining" is that once the economy has fully recovered consumers will be in better "fiscal health than before to the recession," when they were piling up debts they couldn't afford to pay.
"Consumer credit fell 4.5 percent in May"
Things will get worse before they get better: A lot of things are discouraging people from borrowing — banks are tightening lending, and consumers' credit scores are falling as they lose their jobs or default on their mortgages, says Douglas A. McIntyre at 24/7 Wall St. And it could take years for people to repair their credit scores, so the effect will probably be a long-term decline in consumer spending. So unless you're one of the lucky few who can afford to pay cash for everything, tighten your belt — for the foreseeable future, austerity will be "the rule of the day."
"American credit scores crash to new lows"