Credit Card Balances Increase First Time Since August 2008

Strong holiday shopping may have drove Americans to dust off their credit cards. For the first time in 28 months, revolving credit increased, according to the Federal Reserve. This is a pretty major reversal of a trend that had showed consumers determined to pay down their credit card debt. Is this the start of a new wave of rising revolving debt, or was December just a blip?

First, here's the overall consumer credit picture, via Fed data:

consumer credit 2010-12.png

Total consumer credit, excluding real estate-related debt, increased at an annualized rate of 3.0%, or $6.1 billion in December. Within that total, nonrevolving credit rose at an annualized rate of 2.8%, or $3.8 billion. But as mentioned, the major reversal was the hefty increase in revolving debt. It was up at an annualized rate of 3.5%, or $2.3 billion. It's the first increase since before the financial crisis hit its climax.

Interestingly, finance companies appear to be loosening their grip on consumer credit availability. Their debt holdings increased by $27.5 billion, or a annualized rate of 63.6% in December. Nonfinancial business also saw their credit holdings increasing significantly, which may show retailers providing more credit for the holidays. Their holdings increased by $3.1 billion, or an annualized rate of 66.1% during the month. This was offset by commercial banks actually cutting their credit holdings by $10 billion, which is an annualized decline of 10.9%.

The really big news, however, is the increase in revolving credit. To provide some perspective, here's another chart showing its monthly change since the recession began in December 2007:

revolving credit 2010-12.png

As you can see, December provided a pretty big change compared to the prior few years.

So are the American consumers really back to running up their credit card balances again? As mentioned, this could be a temporary phenomenon associated with holiday spending. If we see a huge plummet in revolving credit for January, then that means Americans just bought a lot of merchandise on their credit cards and paid most of it off immediately in the following month.

But the revolving credit figures are seasonally adjusted. If the Fed's adjustment factors attempt to account for holiday shopping, then you wouldn't have expected to see such a significant increase. That would imply that the revolving credit increase is the sign of a new behavior, not just a one-time seasonal effect.

Ultimately, we'll have to wait another month or two to see if this increase in credit card balances represents a new trend or just more confident consumers buying lots of holiday gifts and then going back to paying down their credit cards in subsequent months. Both results would have positive and negative effects on the economy. Americans had been overburdened with credit card debt leading into the recession, so freeing themselves of $175 billion in revolving debt since 2008 is certainly a welcome development. But if they're spending more that could demonstrate stronger consumer demand to businesses and spur hiring.