NEW YORK (MainStreet) — Consumers took a breather and paid down credit cards in August, but allocated more of their budgets towards auto loan expenses.
According to Federal Reserve data released this week, revolving debt, which includes credit card debt, dropped at an annualized rate of 0.3% to $880.3 billion. Consumers have been charging more on their credit cards lately, with debt levels increasing 2.5% in June and 7.4% in August.
Rising debt means consumers feel more secure about their finances and are willing to live on the financial edge. Taking on credit card debt poses risks, especially in the event of an unexpected job loss or health emergency.
“It’s good that we saw the decrease in August after months of a strong run up in credit card usage,” says Chris Christopher, director, U.S. macroeconomics & global consumer at¿IHS Economics. “It shows that consumers are not willing to stick their necks out too far due to the memory of what happened six years ago during the recession.”
While credit card debt levels speak volumes about the state of the consumer, cardinal personal finance advice centers on staying debt-free.
“Step one to tackling debt is to stop the bleeding, which is in line with these latest numbers,” says John Ulzheimer, president of consumer education at CreditSesame. “The best debt reduction strategy in the world is meaningless if you continue to accrue more debt.”
Once you take control of your spending, start examining your minimum payment more carefully, which is calculated in a way to keep you in debt.
As a general rule of thumb, consistently paying double the minimum payment each month will make you whole with the credit card company in two years, regardless of how much debt you have.
The aforementioned report also showed consumers taking on more auto and student loans, accounted for in non-revolving debt, which rose at an annualized rate of 7% in August to $2.367 trillion.
“The consumer is doing things in fits and starts,” Christopher says. “They’ll buy that car, but hold off on discretionary spending.”
The Commerce Department said auto sales rose 1.5% in August and 9.5% year-over-year, as MainStreetreported, explaining the uptick in non-revolving debt during the month.
This comes just weeks before the holiday shopping season starts, which forecasts show a 4-4.5% increase in sales year-over-year, according to Deloitte. Consumer spending habits will be watched closely, as the holiday season is the largest shopping period of the year.
“We’re forecasting flat credit card usage month-over-month during the holiday season and while retailers will do better this year, last year was a low bar due to the government shutdown,” Christopher adds.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.