This article was last updated on July 27
It was recently reported, by the Federal Reserve, that consumer borrowing surged again in March. Consumers increased their borrowing at an annual rate of 7.2%, compared with a 3.1% rate of increase in February. Here is a summary of the worrying borrowing and debt figures:
The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting. The bigger gain was seen as a sign that the weaker economy was forcing consumers to increase their borrowing to support spending. It reflected strong borrowing on credit cards and also in the category that includes auto loans.
Borrowing on credit cards was up at an annual rate of 7.9%, compared to a 5% gain in February, while borrowing in the category that includes auto loans jumped at a rate of 6.8%, compared to a 2% increase in February.
The overall growth in debt of 7.2% at an annual rate was the biggest gain since an increase of 8.25% last November. Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
It was the growth in credit card borrowing/debt that struck me the most. In a country where all forms of media have continually said that “Credit Card debt is BAD – because it is the most expensive form of debt”, consumers still continue to charge it. If you pay off your credit card on time and don’t carry a balance, then credit cards are fine – I use them like this for the reward points and cash back.
However, the rising figures on credit card usage and debt surely includes a majority of people who do not pay off their balance on time and continue to carry the high interest debt. You would think people would only turn to credit cards for borrowing as the last resort, when in financial distress, which may be part of the reason for growth in credit card debt growth as banks tighten up on other forms of lending. However, the growth in credit card debt cannot be solely attributed to those in financial distress (for whom it is probably hard to get credit cards anyway), so the rest of the population must still be actively using and piling on credit card debt. Have people not yet learned their lessons from all credit card horror stories in the media! I guess for some the following adage applies “To debt do us part”.
Switching on my investor brain (this is an investing blog as well after all), one way you could just profit from this trend is by buying Visa (V) and MasterCard (MA) stock – companies who should profit from consumers continuing to buy things on credit. If you can’t beat ’em, you might as well join them.