Why are Americans suddenly borrowing much less with their credit cards, and what does that mean for the economy? The Federal Reserve Board’s August Consumer Credit Report shows a decrease in revolving credit, which includes credit card debt. The last time we saw a decline in borrowing like this was in 2020 during the COVID-19 pandemic, but today’s economic conditions are different.
Consumers face higher borrowing costs today, which may make them reluctant to carry a credit card balance. At the same time, it’s more difficult for borrowers to access credit as lenders tighten credit standards. These factors have reduced the overall level of consumer revolving-credit debt.
[Read: Best Credit Cards.]
The Consumer Credit Report
The Federal Reserve Board reported a 1.2% year-over-year decrease in August in revolving credit, which is a line of credit you can borrow against and pay over time. The same measure saw a 0.4% decrease in the June report, but there haven’t been any other declines since 2020.
The decline contrasts with nonrevolving credit, such as auto loans, student debt and mortgages, which increased at an annual rate of 3.3%. While consumers are still borrowing for necessary expenses such as vehicles and education, they are reining in short-term, high-interest borrowing. Amid uncertain economic conditions, consumers may prefer the predictability of nonrevolving debt with fixed payments rather than variable-rate credit card debt.
Why Revolving Credit Use Declined
Higher interest rates, tighter credit standards, inflation and reduced consumer spending all contribute to the decline in revolving credit use.
Higher Interest Rates
Interest rates influence borrowing and spending, and revolving credit card balances are more costly when interest rates are high. That incentivizes consumers to pay down their credit card balances and spend less on cards subject to high interest rates.
“When interest rates are up, borrowing money becomes more expensive, discouraging consumers from using their credit cards,” says Andrea Woroch, a money-saving expert, former consumer advisor with Kinoli and former contributor to U.S. News.
Tightened Credit Card Approvals and Credit Limits
Accessibility can be another factor, as credit card issuers have tightened standards for credit card approvals and credit lines. The July Senior Loan Officer Opinion Survey on Bank Lending Practices
reported lowering credit limits and increasing minimum credit score requirements for credit cards.
“A consumer that sees their credit limit reduced from $20,000 to $10,000 and is carrying a $10,000 balance can’t spend,” says Jamie Strayer, creator and executive producer of “Opportunity Knocks” on PBS, a show about personal finance and economic mobility. “Similarly, a consumer with reduced available credit who is not fully leveraged is more carefully managing that for emergencies.”
Woroch says it’s more important than ever to keep your credit score in top shape as banks look for higher credit score requirements for approvals and qualifying for the best interest rates.
Limited Consumer Spending
Limitations in consumer spending can contribute to less revolving credit use. Inflation has eroded the available incomes of many households as consumers face economic uncertainty, rising costs of living and a potential recession. Households may prioritize necessities, such as housing and food, rather than discretionary purchases that may be financed with credit cards.
Seasonal spending patterns may also be involved in the latest revolving credit decline. Households typically borrow less in midyear months compared with the holiday season.
A decline in consumer borrowing can lead to slow economic growth — it can dampen retail sales, travel and dining, all which rely on consumer spending. The last time the U.S. experienced a comparable decline in revolving credit was during the COVID-19 pandemic.
The pandemic drop in consumer borrowing was largely driven by fewer spending opportunities as businesses shut down and communities were encouraged to stay home. However, many consumers spent less because they were also worried about their personal finances. “During the pandemic, people were locked in their homes instead of out spending, including on seasonal clothing, dining and activities,” says Strayer. “As lenders are tightening credit standards and reducing lines of credit, consumers are living closer to their credit line.”
[Read: Best 0% APR Credit Cards.]
How Consumers Can Manage Revolving Credit Card Debt
Managing debt is a major part of maintaining financial health. Woroch advises consumers to build up savings first, consolidate high-interest debt, reassess spending habits and boost cash flow in a comprehensive debt management strategy.
Building savings is essential to avoid relying on credit cards for emergencies. When an unexpected bill pops up, emergency savings can cover it instead of adding to your credit card debt.
Consolidating high-interest credit card debt with balance transfer cards or personal loans can reduce your overall interest payments and help you get out of debt faster. However, you should keep your credit cards open even after paying off balances so you have more available credit. Credit utilization is a major factor in your credit score, and having more available credit can boost your credit score and make it easier for you to get approved for financial products.
Contact your credit card issuer if you’re struggling with credit card debt so you can take advantage of hardship programs or create a payment plan to stay on track with debt repayment. Proactively managing debt is crucial, especially as credit standards tighten.
“Follow the trend of consolidating revolving credit into nonrevolving personal loans to reduce interest rates, but do not close the cards,” says Strayer. She advises consumers to use credit cards but not max out credit lines. Make consistent, on-time payments, even if you only manage a minimum payment.
Examine your spending habits to cut unnecessary purchases and maximize your budget. “Identify and eliminate spending triggers — if you can’t resist a sale, unsubscribe from email newsletters and delete store apps from your phone,” says Wororch.
But Woroch says the best way to pay down debt, boost savings and create financial security is to earn more money. “Getting a better-paying job may not be an option at the moment,” she says, “but there are plenty of flexible side hustles you can do in your spare time.”
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Big Drop in Credit Card Debt originally appeared on usnews.com
