Slower Credit Growth for the New Year
Are you using more or less credit these days? If your habits track the latest data released by the Federal Reserve, your rate of consumer credit growth has slowed considerably.
The Fed's release for January 2017 revealed that outstanding consumer credit rose by $8.8 billion to $3.77 trillion for a seasonally adjusted annualized growth rate of 2.8% — the slowest rate of consumer credit growth in over five years. This aligns with the Fed's December 2016 report showing that 2016 as a whole brought the smallest annual increase in household credit since 2013.
January's change was driven in large part by a drop in revolving credit (such as credit card debt). Revolving credit dropped by $3.8 billion, partially neutralizing a $12.6 billion increase in non-revolving credit like student loans and auto loans.
It's Too Early to Tell
One potential implication: consumers are beginning to put the brakes on credit card spending and have shifted to paying down their credit card debt. Data from the annual tax refund survey by the National Retail Federation seems to back up this hypothesis. The percentage of people that intend to spend this year's tax refunds hit an all-time survey low, while the percentage that intend to apply their tax refunds to paying down debt is rising.
Does the drop in revolving credit mean that consumers have more money overall, reducing the need to rely on credit and allowing them to pay down debt, or does it mean people are using their limited increases more wisely and cutting back on spending? One can't conclude anything from a single month's data, but the latter is more likely.
Long-term data from the St. Louis Fed suggests that Personal Consumption Expenditures (aka consumer spending) are tracking on the same general curve that they have been for many years. Similarly, the Bureau of Labor Statistics (BLS) shows that wages have been exhibiting the same slow growth for years, barely keeping up with inflation.
Does this square with a soaring stock market? Keep in mind that the stock market and economy are two different things. Economic growth is reflected in the current gross domestic product (GDP), which has continued on its relatively slow pace of growth (1.9% in Q4 2016). The stock market is based on assessment of value and expectations of future value (at the moment dominated by Trumpian economic optimism).
Pay Down your Debt and Join the Crowd
If you are bucking the January consumer credit numbers and dealing with increasing personal credit and/or debt, how can you turn your situation around? Start by reviewing your budget — or creating one, if you don't have one — and look for ways to trim your spending and potentially increase your income, reducing the need for credit.
Once you are armed with extra funds, choose your preferred method of paying down debt. LaTisha Styles, Millennial Financial Expert and Founder of Financial Success Media, LLC, outlines the two primary methods: "In the first way, what you do is pay off the debts with the smallest balance.... In the second way, you pay off the debt with the highest interest rate." The second way is preferable for saving the most money, especially if your highest interest rate account (typically credit cards) has a higher balance. However, some people prefer the motivation of "quick wins" from paying off accounts sooner.
If you can draw extra willpower from more of your fellow Americans paying down credit card debt, by all means, do so. It's a difficult but rewarding goal to reach, so take advantage of all the moral support that you can get.
A single month of slowing consumer credit won't send economists and banks into panic, nor will it give the members of the National Retail Federation many sleepless nights. January's drop in revolving credit may simply be a correction from the previous November's unusually large revolving credit increase of $11.8 billion. Even so, economists and policy makers will be watching the numbers to see if consumers create a lasting trend of borrowing less and paying down debt. If that trend corresponds with lower spending instead of higher wages, it could suggest an upcoming economic slowdown.
On a personal level, limited borrowing and paying down of debt should always be your goal. Every little bit that you can save on interest charges or unmade purchases can be put toward family emergency funds, college funds for your children, and your retirement accounts. While 70% of the economy may be driven by consumer purchases, there's nothing wrong with letting your fellow consumers share more of that burden.
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