South-Western College Publishing - Economics  
Credit Buying on the Increase
Topic Aggregate Demand / Aggregate Supply
Key Words Consumer Borrowing, Home Equity Loans, and Revolving Debt
Full Article

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Reference ID: A163083953

News Story Home equity loans and high real estate values allow consumers to spend more in a given period than they are actually making. With the lower real estate values associated with the housing slump, consumers cannot borrow as much on their home equity. They seem to be turning to credit cards to fulfill their non-mortgage borrowing.

A strong job market has positioned consumers for high credit limits and easy spending through their credit card accounts and they are taking advantage of it. Consumer credit –non-mortgage loans to individuals – increased $13.5 billion for an increase of 6.7 percent for April. This resulted in total outstanding consumer credit of $2.425 trillion.

Economists watch consumer credit and consumer spending because of its impact on overall economic activity. In fact consumer spending alone accounts for about two-thirds of all spending in the economy.

Revolving debt, the name given to credit card type buying rose by $6.8 billion in March after only a $2.2 billion rise a month earlier. Non-revolving debt like loans on mobile homes, automobiles and other durable goods increased $6.7 billion in March after posting an increase of only $3.4 billion a month earlier.

The total increase in consumer credit of $13.5 billion in March was the largest since November of 2006 when it reached $20.1 billion. Coupled with low unemployment and a growing number of jobs in the economy, this willingness of the American consumer to use their credit cards freely will likely result in a continuation of strong consumer spending and the accompanying economic growth.

“The jobs situation is favorable, and people probably have the income to spend with the jobs still growing but at a modest pace, said Gary Thayer, chief economist at A.B. Edwards & Sons. “We’ll probably see modest spending growth going forward.”

Questions
Discussion Questions:
1. Why do you think consumers have increased their use of credit cards?
2. Visit http://moneycentral.msn.com/content/savinganddebt/p70581.asp and find out about how many American families spend more than they earn and how much of the debt is credit card debt.
Multiple Choice/True False Questions:
1. Credit card debt includes spending on new cars and mobile homes.

  1. True
  2. False
2. Credit card debt is considered to be a non-revolving type of debt.

  1. True
  2. False
Source Bloomberg News, “Consumer Borrowing Increased in March by Most in 4 Months”, The New York Times Online, May 8, 2007. .
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