Revolving Credit Contracts as Consumers Turn Risk-Averse

The latest Federal Reserve data on U.S. consumer borrowing shows that revolving credit contracted at an annualized rate of 5.5% in August, a sharp reversal from July when it grew 10.3%.

Credit card issuers rely on consumer spending for revenue. The stark change in recent revolving credit may signal an emerging pattern of consumer caution that threatens to eat into issuers’ bottom lines. 

The dramatic drop in revolving credit contributed to only a 0.1% August growth rate in overall consumer credit.

The slowdown in spending may be due to people having less confidence in the economy and their ability to earn a living in the near future.

The Federal Reserve Bank of New York recently released a survey that showed median inflation expectations among consumers rose for both their one-year and five-year outlooks.

A recent Fed report reveals that consumers expect inflation to ramp up over the next year.

The Federal Reserve cut the federal funds rate by a quarter of a percentage point in September, which may serve to boost fears of growing inflation.

Concerns about the labor market in the U.S. could also be causing consumers to keep a tighter rein on their credit card spending.

Consumer expectations that the unemployment rate in the U.S. will grow over the next year ticked higher in September, according to the survey. People also don’t foresee big gains in their paychecks over the coming year, as the survey indicates that the median one-year-ahead expectations for earnings growth decreased to its lowest point since April 2021.

Not all of the cutbacks in consumer use of revolving credit in August may be due to gloomy outlooks on the economy.

The Fed report on consumer borrowing reveals that the average assessed interest rate on credit cards shot up to 22.8% in August, which is higher than the rates the Fed reported for the first and second quarters of the year.

“For many Americans carrying credit card balances, high interest rates charged on those accounts remain a financial burden,” Bloomberg wrote in recent coverage of consumer borrowing in the U.S.

In an environment where people may be more cautious about using their credit cards, issuers still have a few levers they can pull to encourage consumers to accelerate card spending.

The average assessed interest rate on credit cards in August stood at 22.8%.

Issuers can promote spending on essential items, including groceries and gas, by offering temporary increases on rewards for those categories.

They can also offer fee-based programs that bring value to cardholders. Identity protection and credit monitoring services may be more attractive to certain segments of their customer base in times when many have concerns about their finances.

Credit card issuers can also use analytics to identify cardholders who may be at risk of missing payments, and they can offer financial education tools to help them manage their money.

Though that step likely includes an upfront investment, issuers may be rewarded with more loyal customers who ramp up their card spending when they get their finances in order.