Borrowing Drops For First Time In Ten Years
MADELEINE BRAND, host:
From NPR News, this is Day to Day. This whole financial mess is having an effect on our spending. People are borrowing less, both on their credit cards and for larger loans for things like cars. That's according to a report out today from the Federal Reserve. Marketplace's Mitchell Hartman is here now with the details. And Mitchell, how much of a decline in borrowing are we talking about?
MITCHELL HARTMAN: Well, there are two kinds of consumer debt here that we're seeing going down. Revolving debt, which is stuff like credit cards, that's where you can charge more each month up to your credit limit. You pay some or all of the principal and interest every month, and that could just be a minimum payment. And there's non-revolving debt. That's something like a car loan or a student loan, where you borrow a fixed amount and then you just pay it down with interest over time. So, the Fed's report says that overall consumer borrowing was down 3.7 percent in August. That's compared to one year ago. It's the first decline since 1998. Borrowing hasn't been consistently down since the 1990 recession. And the big decline here is the non-revolving part of this debt, and that is mostly car loans.
BRAND: And why the biggest decline in car loans?
HARTMAN: Well, for one thing, new car sales have been falling. So there's just less demand for the loans to begin with. And in addition, credit standards are tighter. So it may be harder to buy a car now but start paying for it later. Also, people who bought SUVs and trucks before the price of gasoline shot up, you know, they may not all be that keen on keeping paying for a vehicle to gets lousy gas mileage, and then has also lost some of its resale value. In fact, this is what the folks who help consumers are seeing. Dave Jones runs the Association of Independent Consumer Credit Counseling agencies.
Mr. DAVID JONES (President, Association of Independent Consumer Credit Counseling): We have seen some unprecedented things. People are walking away from automobile loans, which they had never done in history. And of course, the car is repossessed and their credit is hit for that. But they're willing to walk away from that just as they're walking away from homes that they're upside down in now.
Mr. HARTMAN: And what Jones means by upside down is they probably owe more on the vehicle than it's worth at this point. So it's just no good hanging onto it anymore.
BRAND: Mitchell, for a long time, consumer counselors have told us that we should reduce our personal debt, that we should not borrow so much on our credit cards with those high interest rates. So, isn't this a good thing?
HARTMAN: You know, I hate to say it, but it's not really. Jones says it's more likely just another indication that consumers are in real trouble with the debt that they've already racked up. His agencies are seeing around 20 percent more people come in the door for credit counseling than they did last year. And right now, the average American household has around $8,000 in credit card debt, and that number is up from last year. Finally, keep in mind this is a lagging indicator. This decline was for August. You know, everything that's happened since then points to consumer credit probably having gone down even more in September. So what economists say this really indicates isn't a smarter, more prudent consumer, but just one who's saving for necessities and holding on to his cash or her cash for dear life.
BRAND: Thanks, Mitchell. That's Mitchell Hartman of Public Radio's daily business show Marketplace. Stay with us. NPR's Day to Day continues.