Slash The Cash

Are consumers finally becoming more responsible with their credit cards these days, or is being approved for a new plastic card becoming harder?
In July of this year the American consumer reduced their total credit card dept by $21.6 billion, when $4 billion was expected. Economist have expected that consumers will spend less, decreasing credit card debt, but not by this amount. The last time consumers were this close to cutting their credit card spending was in 1943. But what has really stumped the economists is which force is influencing the decreased borrowing. Is it the lack of demand by consumers who might be cutting up their credit cards? Or is it the lack of credit supply from the banks?
I say both. The downturn in the economy has left consumers more cautious in spending, especially as unemployment rises. Consumers don't want to be caught paying for purchases they made on credit while unemployment is expected to rise. In addition the credit crunch has caused banks to put lower limits on credit cards, as well as increase the standards to obtain credit.

Consumer slash borrowing by record amount


Connor said...

I think it's about time both consumers and banks tread the spending and lending world a little more carefully. Of course banks have less money to spread around because many of them were careless in their lending habits.

If consumers are actually saving and or paying down there debts then I say hallelujah. It's a great thing that consumer are able to obtain less credit, perhaps it is a step in the right direction from years of overspending and over-lending! Great article.

Maya said...

Paying down debt is good for the consumer, and increased standards for lending to candidates assists the invisible hand of the market to regulate the system to equilibrium. As the market regulates, lending should increase to those qualified (though the total will not reach previous levels) and increase the overall health of the market.

Kylie said...

I thought this was a great article. I would agree that both consumers have become more cautious and lenders have become more strict. The economy was functioning at at unsustainable rate in many ways, and a huge correction in the market was expected.

Daniel said...

I agree with Kylie, credit is harder to obtain and the “discretionary” debt appetite has waned. Debt is generally shouldered for two reasons: (1) out of necessity or (2) because of optimism (“I’ll have no problem paying that off later” mentality. Some companies and individuals need debt to remain solvent and thus shoulder debt out of necessity – these folks are really struggling in to survive in this economy. But there are also those who use debt as a means to enhance lifestyle urges or companies taking on debt to fuel growth – despite there ability to survive without it – these folks seem to have “come back to earth.” Job security is down and companies are much more realistic about growth projections, thus discretionary debt is down. However, in the long run, this decreased debt load will likely be a good thing – if only the government would follow suit!

Rachel said...
This comment has been removed by the author.
Rachel said...

Today time is critical for borrowers and lenders. I believe reduce the credit debt is good news for both consumers and banks. Now days unemployment increase and reach on the higher level so people think before spend penny and Banks think before give credit any one.I agree with Kennedy both factor are effective for reduce credit debt (1) The lack of demand by consumers who might be cutting up their credit cards. (2) The lack of credit supply from the banks.

Michael said...

i agree with this article.If my income is more then i can keep more credit card and i am not worry about my dept. But with decreasing in income and with rising of unemployment rate people demand less and they do not want to apply for extra credit card. On the other hand bank also has less money. so bank can not afford to supply more credit card. so here i agree that this is lake of supply and lake of the demand issue.

Dr. Tufte said...

-1 on Connor and Daniel for spelling and grammatical errors.

-2 on Rachel and Michael for multiple spelling and grammatical errors.

Frankly, I'm confused by the whole issue. We are way to glad (collectively) that people are pulling back on one particular type of debt purchase. How much do we know about the relative pull back in credit cards vs. other forms of debt? How much do we know about whether we overspent on one for of debt or another during the expansion. And, either way, shouldn't the way to evaluate debt be in terms of how it plays out on our balance sheets rather than in absolute amounts?

All of this makes me think that we are experiencing an attack of Puritanism than probably isn't well founded in decent economics. Soon, the sky won't be falling any more, and a lot of this will sound silly. I encourage you to revisit what you wrote here in a few years.