Back to Plastic: Rise in Credit Card Borrowing Another Sign of Hard Times

Consumer borrowing can be a powerful sign of economic confidence, an indication that households are feeling flush and assured of their future ability to pay back debt without undue difficulty. So when the Federal Reserve reported late last week that Americans borrowed more this June than they had any other month in almost four years, it might have been good news, a long-sought indication of economic resurgence. Credit card debt was up a hefty 7.9 percent! American consumers were back and they were bringing the plastic!

Except that consumers weren’t back. In fact, the Department of Commerce indicated that consumer spending actually declined in June. One interpretation: American households were spending less, but putting more of what they bought on their credit cards. Suddenly, the situation looks less like a sign of economic optimism and more like an indicator of desperation. While it’s too soon to tell for sure, the pattern of borrowing looks eerily reminiscent of what Demos found at the outset of the recession, just as lenders were beginning to tighten the reins on consumer credit and before Americans’ credit card debt began to decline in earnest.  

Demos’ household consumer debt survey, conducted near the start of the recession in 2008, found that more than one in three low- and moderate-income households that carried credit card debt used their cards to pay for basic household expenses like rent, mortgage payments, groceries, utilities or insurance, running up interest charges just to keep their heads above water on a monthly basis. Even more common was the use of credit cards as a safety net, a means to pay for necessities like car repairs, to make ends meet after losing a job, to keep a small business afloat or to make it through college. Three out of four indebted low- to moderate-income households reported using their credit cards this way, as a de facto safety net to protect against economic shocks. The use of credit cards to deal with unexpected medical expenses -- an economic shock in their own right -- was also common.

A renewed reliance on “the plastic safety net” of credit card borrowing to make ends meet comes as increasing numbers of Americans are also turning to the public safety net, signing up for food stamps in record numbers.  But with no extension of unemployment benefits yet on the horizon and the revolting debt ceiling deal threatening severe cutbacks to the already inadequate public safety net, plastic, for all its shortcomings, won’t be enough to pick up the slack.