Credit Card Users Smarten Up

There’s been a remarkable shift from reckless use of credit to much thriftier habits.

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The reckless use of credit helped trash the economy a few years ago. Now, Americans are finally spending the way they're supposed to.

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New data from rating agency Fitch show that most metrics used to gauge credit card users' behavior show a remarkable shift from profligacy to thriftiness. The portion of delinquent accounts, for instance, is at the lowest level since Fitch started tracking the data in 1991. More people pay off their balance in full each month and fewer carry a balance. "The credit-card universe is much more high-quality than it has been historically," says Michael Dean, a Fitch managing director. "Consumers are being much more prudent."

The typical credit card charge-off rate—the amount lenders write off because cardholders can't pay—has been around 6 percent since 1991. It hit a short-lived low of 3.1 percent in 2006, which was the peak of the housing bubble and use of home-equity loans to finance all kinds of purchases. Once the housing bubble burst and the subsequent recession hit, the charge-off rate skyrocketed, peaking at 11.4 percent in early 2010.

By 2011, the charge-off rate was falling abruptly, and it's been below the historical norm for the last year or so. That's partly because of chastened consumers using plastic more responsibly, but also because banks have reeled in credit to riskier borrowers, especially subprime consumers with low credit scores.

Data from the Federal Reserve show that the total number of credit card accounts has plunged from nearly 500 million in 2008 to just 380 million currently. The total amount of credit offered by banks to borrowers has fallen by roughly $1 trillion since 2008, to about $2.7 trillion. So banks themselves are enforcing much stricter limits on how much spending cardholders can rack up.After the debt-fueled spending binge that led to the Great Recession, most economists believe the constriction of credit that's occurred during the last five years—"deleveraging"—is essential for the economy to heal properly. For consumers and most parts of the private sector, that process may nearly be finished. Other types of debt, such as mortgages and auto loans, have also fallen from bubble-fueled highs to more normal levels.

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There are two exceptions to the deleveraging trend: student loans and federal debt. Total student loan balances have risen to nearly $1 trillion, with default rates now higher than for any other type of debt. Washington, meanwhile, has just begun to deal with record levels of federal debt, with that deleveraging process likely to take years and involve much more of the political warfare voters are already sick of.

Consumer balance sheets are in better shape, which is why consumers, once again, seem to hold the key to the economic outlook. Surprisingly strong growth in retail sales, for instance, shows that consumers are spending more even as tax hikes reduce their paychecks and other budget battles in Washington threaten to damage a fragile economy.

The thrifty use of credit cards, in fact, may turn out to be an anomaly, with shoppers soon returning to the looser spending habits of the past. Dean expects charge-off and delinquency rates to rise back toward historical norms, as banks gradually extend credit to more consumers. That's not necessarily a bad thing. Many borrowers will benefit from expanded access to credit, and banks will probably make enough extra money—by charging higher rates to riskier borrowers—to offset the losses from more charge-offs.

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The real key to better spending habits, however, isn't just more borrowing. It's aligning the increased use of credit with increases in disposable income—while still finding ways to save money and prepare for retirement. The savings rate has been falling, however, which suggests the lure of spending is hard to resist. Some things may never change.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.