With Consumer Credit Up Sharply, Is America Releveraging?

After two years of relative frugality caused by the financial crisis, Americans are again borrowing in a big way. Credit card debt is spiraling upwards, car loans are fueling big sales in Detroit and even stock market investors are loading up on debt.

A series of data releases about consumer borrowing this week paints a picture of an economy that's rebounding smartly from its earlier doldrums. But have consumers learned any lessons about loading up on the red ink?

According to the Federal Reserve, outstanding consumer revolving debt, which is mainly credit cards, increased from $807.2 billion in November to $826.6 billion in December, a 2.5% increase in a single month. Outstanding nonrevolving debt, such as auto loans, rose from $1.608 trillion in November to $1.611 trillion in December. Automakers have reported a sharp increase in sales in the fourth quarter, with Detroit taking the lion's share of the jump.

The New York Stock Exchange released data showing that margin credit -- money investors borrow to buy shares -- increased to $276 billion in December, up from $233 billion at the start of the year. That reflects a sharply higher stock market but also an increased appetite for borrowing.

Combined, the two reports raise a key question: Is America releverging?

"Not Grounded in Reality"

The increase in monthly credit card outstanding balances was the first reported rise in 27 months. But Odysseas Papadimitriou, CEO of Evolution Finance, which publishes a credit card comparison site called cardhub.com, says the Fed's figures may significantly underestimate the actual increase in borrowing.

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That's because the Fed include charge-offs of credit card debt that consumers can't pay. Assuming charge-offs were around $5 billion in December, Papadimitriou says outstanding debt may have grown by $25 billion instead of $19.6 billion, 20% more than the Fed reported.

"There is a segment of the population whose expectations are not grounded in reality," Papadimitriou says. "They think their spending can go back to pre-recession levels, when in fact the housing bubble was responsible for allowing them to have that level of spending."

Nonetheless, Adam Levin, chairman of credit-counseling website credit.com says he has detected a new sense of frugality among consumers.

In a poll credit.com conducted last month, when asked how they intended to deal with their holiday debt, 60% of respondents said they are planning to pay the debt in full, 13% said they would carry a credit card balance and 26% said they came out of the holidays with no debt. Last year, only 45% said they intended to pay off their debt in full.

"A New Sense of Frugality"

"People were feeling better and spent, but they were a bit more frugal," Levin says. "That could be because they were forced to – banks shut down a lot of accounts and raised credit limits – because they are fearful of what may be an uncertain economy or because there is a new sense of frugality basically branded into us, based on what we have lived through in the past few years."

Levin says credit card solicitations were much higher this year than last year, but they were mainly aimed at consumers with high credit scores.

However, another Fed survey does show a loosening of credit, saying "banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving consumer credit card applications."

While consumer spending is great for the economy, is increased borrowing good for the consumer? It is -- if it's done prudently, within one's income limits. But it will lead to only more trouble if new borrowings are being used to fund purchases that can't be easily paid off.