Are you managing your credit better? Odds are good that the answer is “yes.”
Across the U.S., total balances on credit cards are going up. Bank data from the Federal Reserve shows that aggregate balances rose $31 billion over the past year, or 3.5 percent.
But with more people getting cards, that debt is actually going down on a per-person basis, according to new data from TransUnion. The number of card-carrying consumers increased by 6.8 million over the year, to about 160 million.
According to the big credit bureau, the average credit card balance per person was $5,199 in the second quarter, down $35 from the second quarter of 2014.
OK, a drop of $35 probably isn’t a reason to throw a party. It’s only down 0.7 percent. But it is moving in the right direction.
Parsimonious cardholders aren’t the whole reason, however. While issuers are handing out more cards, they’re hedging their bets on the new customers.
“Issuers are making more loans, with a lower overall credit limit,” said Paul Siegfried, leader of TransUnion’s credit card business. Subprime applicants, who generated much of the growth in accounts, got average credit limits of $923 in the second quarter. That was the lowest average limit in three years.
“We believe this is a deliberate strategy by credit card issuers to issue cards to more people, yet control for the risk that involves,” Siegfried said.
Lower credit limits restrict card debt in a couple ways. Of course, people who max out their card will hit the maximum sooner. But others are affected as well. If you’re trying to maintain your credit score or improve it, you’ll work to keep your utilization rate down. The lower the credit limit, the lower the balance needs to be for a given utilization rate.
Compared to the first quarter of the year, balances are up $57 in the second quarter. But that’s not bad either, considering the seasonal cycle of card debt. The months of January, February and March are a tapped-out time of year for most households. We’re struggling to pay down balances built up in the holiday season. Tax refunds and year-end bonuses (for people lucky enough to get a bonus) help us pay down card balances in the first quarter.
In the second quarter we start to come out of hibernation, spending-wise. Total balances on cards typically go up about 1 percent in the quarter, based on 10 years of Fed data. And that’s about what the second quarter’s $57 dollar increase amounts to, a 1.1 percent increase. It’s over the year that balances have come down.
It’s always a good idea to reduce debt on credit cards, but right now is a particularly good time to do so. Interest rate-setters at the Fed are gearing for the first hike in short-term rates since 2006. When the benchmark federal funds rate goes up, rates on variable rate credit cards will rise too, increasing the cost of carrying a balance.