Consumer Credit Trend: Credit Bucks Up

It seems as if the times are changing. In the face of a buckling economy, not only did obtaining credit become increasingly more difficult, but consumers in general, were holding on tight to their purse strings. Now that the dust has settled, things have seemed to take a turn for the better. Banks are lending again and consumer confidence has risen ever so slightly. It isn't unusual to see people buying big ticket items like cars and boats or using their credit cards to finance a vacation.

Taking advantage of seemingly less stringent lending guidelines from creditors, consumers have decided to let loose a little. According to a recent report released by the Federal Reserve, the number of car loans, credit cards and other types of credit accounts increased for the fourth month in a row in January of 2011—sending the total amount of new credit to $5.01 billion, which floored economists because they were only expecting a $3.9 billion increase.

A Sign of the Times

The statistics are sending smoke signals with conflicting messages. The first, demonstrates that consumer confidence in the economy is getting better. People are returning to the market to make purchases that they wouldn't have been able to afford in the past. Second, it reveals that creditors are feeling less frenzied and stressed by the economic situation. In short, things are starting to appear to return to normal.

However, statistics reveal that many of the items being bought at Christmastime were paid for with credit because the consumers in question did not have a sufficient amount of cash on hand. So, despite the optimistic nature of some consumers, the truth of the matter is that the economy has not fully recovered.

Consumer Behavior

A common trend being displayed in the marketplace involves big ticket items. No longer concerned with purchasing everyday necessities, consumers tend to lean towards luxury items. Credit accounts for these big ticket purchases increased by $9.26 billion in January surpassing the $2.07 billion rise we observed in December. January marked the sixth month in a row that car sales in the U.S. were up to the tune of 17%.

Another interesting fact is the types of big ticket purchases consumers are making.

Even though vehicles are at the top of the list, people are choosing hybrid vehicles over traditional vehicles. The 69.9% increase in Toyota Prius sales in February 2011 back this statement up.

What's the reason for the renewed interest in hybrids? With gas on the rise once again, consumers are looking to cut back and save in areas where they can. Despite spending money to buy a new vehicle, they are buying the most cost effective ones on the market so that they have to spend less to make the vehicle go.

Credit Cards

In January, credit card balances fell by $4.25 billion or 4% to a dramatically lower level compared to December of 2010, when economists saw a $2.02 billion increase in credit. Of course, the holidays were the first time that credit card spending had increased since August of 2008. These numbers confirm the fact that consumers are still a bit wary about what they will spend their money on to acquire.

The February retail figures are not in yet, but economists expect the numbers to be at list up by 1%. As the demand for more fuel efficient automobiles increases, sales on hybrid vehicles and vehicles that get up to 40 miles to the gallon are also expected to increase.

While some consumers are still a bit uncertain on the state of the economy, the overall sentiment is that things are starting to return to normal. This includes consumer spending habits.

Kristie Lorette

Kristie Lorette is an award winning credit specialist and an MBA graduate of Nova Southeastern University. Her lengthy tenure includes service at Merrill Lynch where she oversaw a $300 million dollar portfolio and 16 branches. At Merrill Lynch, Kristie specialized in consumer issues related to credit and mortgages. As a writer and researcher in personal finance, Kristie is also a contributor to Yahoo! Shine, Quizzle.com, Moneysmartlife.com and many other online and print publications.