Consumer Borrowing Rises Dramatically

[Jul 31, 2007.]

The Federal Reserve is reporting that consumer borrowing skyrocketed in May—the greatest increase in credit card debt in 6 months. Consumer credit jumped 6.4%, which was a monumental increase over the 1.1% jump in April. In fact, the increase in May was just about twice the amount that financial observers were expecting.

The hike can be attributed to credit cards, which increased 9.8% in May after a minuscule 0.2% rise in April. Analysts note that the increase in credit card debt was the most significant jump since the 14.5% rise last November. Car loan debt was also on the rise, increasing 4.4% in May following a 1.7% jump in April.

Recent statistics indicate the U.S. economy remains sluggish, rising only 0.7% in the first quarter of the year. Economists say that the economy in the first 3 months of 2007 posted its most dismal showing in 4 years. Still, some encouraging news in employment and consumer spending may have helped the economy to recover in the second quarter of the year. In addition, it appears that the gross domestic product may increase 3.5% or more, indicating financial good times may lie ahead.

Even though home sales have been quite disappointing and the price of gasoline has been astronomical, consumer spending apparently remains strong. That could be an indication that confidence in the economy is stronger than many people realize.
Borrowing by consumers rose $12.9 billion to $2.44 trillion, which represents a record amount. Financial experts had been predicting that consumer borrowing would increase by only $6.5 billion.

It may be too soon to say whether consumers are becoming overextended on their credit. However, given the concerns that have been raised nationwide about personal bankruptcies, credit card customers might be wise to assess how much they can realistically pay back before maxing out their credit cards.

Julie Ann Amos
July 31st 2007
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