In spite of unemployment statistics remaining grim and consumer confidence falling, Americans whipped out their plastic and put purchases on credit cards at a higher rate last May than they did since before the recession began, back in November 2012.
On Monday the Federal Reserve said that consumer overall borrowing rose $17.1 billion in May from the previous month, to a total of $2.57 trillion, seasonally adjusted. That’s almost as high as it was in July 2008, the previous record for borrowing.
Cars and Colleges
Most of the increase in borrowing over the last two years has been due to auto loans and student loans, which are also at record highs. Student loans reached $1.7 trillion in May and show no signs of slowing down.
In a weak economy, many people go back to school in search of a different or higher degree that might net them a better job. With unemployment sitting at eight percent and only 75,000 jobs created each month from April through June – a decrease from the first quarter, when 225,000 new jobs were created – the chances that going back to school will pay off don’t seem very good. The jobs just aren’t out there, degree or no degree.
Why are auto loans up? Michael Germanovsky, Editor-in-chief at Credit-Land.com, posits the theory that people need their cars to get to jobs they are lucky enough to have, and may even be taking jobs with longer commutes. “When the job market is tight, people will jump at a job offer they might have left on the table in better economic times. A job with a long commute is better than no job at all, and many people will take out a loan to get a reliable vehicle that will get them to work each day without worry.”
Making Ends Meet – on Credit
Another thing that may account for the May jump in credit card use is people using their credit cards to make everyday purchases they can’t afford. Sure, it’s not a good idea – but when you don’t have the cash, pulling out the plastic is tempting.
Paul Edelstein, director of consumer financial economics at HIS Global Insight, said in an Associated Press article, “It is possible that households are relying more and more on credit cards to cover everyday expenses, given that job and income growth are so weak.”
What should consumers do if they can’t pay the bills and need to put them on credit? Credit-Land.com’s Germanovsky says that credit card customers need to have a plan. “Using a credit card to buy things you can’t afford is never a good idea, but in hard times, people may not have much choice. Customers should never mindlessly hand over their credit cards – always think about how much you’re charging on the card and how you’ll pay it back.”
He continues, “If you need to use your card to get you through until the next paycheck, make sure you know what your interest rate is, what your credit line is, and when your payment due date is. Make sure you don’t max out your card, and that you can make at least the minimum payment due by the due date. Sinking your credit score will put you in an even worse spot, so don’t view your credit card as an emergency fund.”
Borrowing, Up and Down
Economists may differ on whether or not the economy is really in recovery from the recession, but one thing is certain: more borrowing doesn’t necessarily mean that people have the means to pay off their debt. Borrowing did go down when the recession hit, with households reluctant to take on debt they couldn’t pay back, but an increase in credit card use along doesn’t spell recovery.