Consumer credit resumes pullback

As the recession continues, consumers are spending less on their credit cards.

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NEW YORK (CNNMoney.com) -- Consumer credit fell in February, led by a sharp decline in credit card usage, a government report said Tuesday, as the ailing economy and widespread unemployment curbed spending.

Total consumer borrowing fell a seasonally adjusted $7.4 billion, or 3.5%, to $2.564 trillion in February, according to the Federal Reserve.

Revolving credit, which includes credit card debt, tumbled $7.8 billion to $955.7 billion. That's a 9.7% decrease from the previous year.

Economists predicted a decline in total borrowing of $1.5 billion in February, according to a consensus survey from Briefing.com. January saw a revised surprise jump of $8.1 billion in total consumer borrowing.

"Consumer credit has been choppy, but it's clearly on a down trend," said Adam York, an economist at Wachovia. "The magnitude of the credit card debt drop is bigger than expected, but it's not entirely shocking."

Nonrevolving credit - which includes auto and student loans - increased by $300 million, or 0.3%, to $1.608 trillion.

Last August, consumer credit contracted for the first time since January 1998. It rebounded briefly in September before contracting again, falling for three consecutive months to close out 2008.

The difficult economic environment has led cash-strapped consumers to hang on to the money they have and lenders to become less willing to extend lines of credit.

"It's the classic catch-22 of consumer borrowing," York said. "We need consumers to spend to grow the economy. But at the same time, they were overleveraged before, and they need to get on better footing."

Lenders face the tough task of coaxing consumers to "borrow and spend some, but not so much that they default," York said. "It's hard to find that perfect spot."

The economy is shedding jobs by the thousands, and the mass layoffs and pay cuts have exacerbated the credit crunch. Banks have tightened lending standards because of a heightened default risk, providing less credit to consumers.

The nation's unemployment rate spiked to 8.5%, a 25-year high, in March, with a decline of 663,000 jobs in the month. Since January 2008, 5.1 million jobs have been lost in the recession.

York expects a trend of slow growth or minimal declines, though month-to-month volatility will likely continue.

"Just like the troubled companies in our country, consumers are looking to fix their own balance sheets," he said.