Consumer credit: Third straight monthly drop

The Federal Reserve says borrowing by consumers sank by $6.6 billion in December, nearly twice the expected drop.

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By Lara Moscrip, CNNMoney.com contributing writer

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NEW YORK (CNNMoney.com) -- Consumer borrowing tumbled for the third consecutive month in December as the faltering economy continues to pressure households to curb spending.

Consumer borrowing fell by $6.6 billion to $2.562 trillion in December, according to the Federal Reserve. That's a decline from a downwardly revised $2.569 trillion in November.

Economists were expecting consumer credit to fall by $3.5 billion in December, according to a consensus of economists gathered by Briefing.com.

As banks tighten lending standards for consumer loans because of heightened default risk, consumers are finding it tougher to secure credit and are also using less credit.

And the trend is likely to continue this year, according to Mark Vitner, senior economist at Wachovia.

"Right now, consumers are worried about losing their jobs, and their incomes are off, which is pulling down credit use," said Vitner.

"I think consumers are trying to pay down debt, and until unemployment rolls over, folks will be striving to live within their means," he added.

In August, a decrease in non-revolving lines of credit in auto loans prompted consumer credit to decline for the first time since January 1998.

After a rebound in September, consumer credit resumed its decline in October as lending nearly came to a standstill with credit market gauges showing historically tight conditions.

The annual rate of consumer borrowing fell by 3.1% in December, an improvement over the revised 5.1% drop in November.

Credit card borrowing, or revolving debt, fell at an annual rate of 7.8%. Non-revolving borrowing, including student and auto loans, sank by 0.2% on an annual basis.

In fact, during the fourth quarter of 2008, some 60% of lenders tightened standards on credit card loans and 65% said they had tightened standards on other consumer loans, according to the Fed's most recent survey of senior loan officers.

The movement away from spending on credit and toward more savings has mixed implications for the economy, which is heavily dependent on consumer spending.

GDP, the broadest indicator of economic health, contracted 3.8% in the last three months of 2008.

And Friday, the Labor Department reported that employers cut 598,000 jobs from U.S. payrolls in January, bringing the unemployment rate up to 7.6%.  To top of page

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