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Consumer Banking Power at Its Best in Years


NEW YORK ( RateWatch) -- Massive job losses and widespread uncertainty led most American consumers to cut back on new debt during the recession, with debit cards supplanting credit cards as a preferred payment method and home and auto loans falling. But rock-bottom rates on the loan side are finally enticing some consumers to resume their borrowing ways. And some loan officers say that they're seeing increased demand for home loans as well.

" The low rates have definitely sparked some activity," says Greg Patton, assistant vice president of State Bank and Trust in Columbus, Ohio. "Up through early April was as low as I've seen it, but the last three to four weeks' activity has certainly picked up."

A new metric shows consumers are choosing the right time to start borrowing again. The interest rate climate for American consumers improved for the fourth straight month in April, with the Credit Power Index hitting its lowest level in almost three years. As of the end of April, the index stood at 22.98, the first time it's dropped below 23 since September 2008. It also represents a month-to-month drop of 32 basis points, the biggest one-month improvement since August.

The Credit Power Index tracks consumers' banking power by comparing the gap between certificate of deposit interest rates at four terms -- 12, 36, 48 and 60 months -- and the rates on selected loan products at the same terms (personal unsecured loans, home equity loans, new auto loans and adjustable-rate mortgages). The larger the disparity between loan and deposit rates, the higher the index will be, indicating how much consumers are getting squeezed by their banks. (See our graphic for a full explanation of the methodology.) While the index spiked during the recession as consumer banking power eroded, it has since seen moderate improvement on the strength of falling loan rates and relatively stable deposit rates.

As in recent months, all of the improvement in the index can be attributed to falling loan rates, further easing pressure on Americans seeking to borrow money.

"Again this month, the loan component was the lowest we have seen it since we started tracking this indicator in January of 2007," said RateWatch's chief operating officer, Bob Quinn.

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