Consumer Credit Contracts at Record Pace in July

Credit card debt outstanding in the United States has fallen by nearly $70 billion in less than a year and continues its downward spiral, according to a government report released yesterday.

The Federal Reserve said Tuesday that consumer credit outstanding in the U.S. declined by $21.5 billion in July, the largest monthly drop on record. The annualized rate of decline, 10.4 percent, was also the largest on record.

The Fed, in its monthly G.19 report on consumer debt, said that revolving debt – mostly credit cards – fell at an 8 percent annual rate in July, or by $6.1 billion. July marked the 11th straight month of declines in credit card debt.

In those 11 months, consumers have shed nearly $70 billion off credit card balances. Banks have also had a hand in the decline, tightening credit lines for their customers.

The trend is one that the accounts receivable management industry, particularly credit card collectors, will need to monitor, according to Mark Russell, director at ARM industry advisory firm Kaulkin Ginsberg.

“ARM companies that specialize in credit cards have been swamped with work this year,” Russell noted. “But if credit card debt continues to contract, there may be fewer accounts to work down the road.”

Collection agencies said that they had more work in the second quarter of 2009 in insideARM’s latest Quarterly Credit & Debt Collection Industry Confidence Survey. Of the collection agencies that said they specialized in financial services work (which includes credit cards), 63.4 percent reported an increase in account placements in the second quarter, up slightly from the 63 percent that answered the same way in the first quarter. But those numbers were significantly higher than the 53 percent that saw an increase in account placements in the second quarter of 2008.

In July, non-revolving debt – like that found in auto, student and personal loans – paced overall declines in consumer credit outstanding. The Fed said that non-revolving debt contracted by $15.4 billion, or at an annual rate of 11.7 percent. The G.19 report does not cover real estate loans.

The decline in non-revolving debt for July will likely prove to be an anomaly, as consumers probably held back on auto purchases for most of the month until the government’s “Cash for Clunkers” program was launched on July 24. As such, the Fed’s non-revolving debt in August is expected to show a significant increase. Student loans also began to roll out in earnest in August.

Taken overall, July’s drop was unexpected and far exceeded economists’ predictions. Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month.

Total consumer debt outstanding in the U.S., excluding real estate loans, stood at $2.472 trillion at the end of July, down from its all-time high of $2.581 trillion at the end of July 2008.