Consumer Credit Inquiries Are Declining, Is That A Good Thing?

According to an old adage, there are only two certainties in life: death and taxes. Maybe we should add debt to the list.

The New York Federal Reserve's latest Quarterly Report on Household Debt and Credit shows that household debt rose by $869 billion in Q4 2018 to hit $13.54 trillion. That's the 18^th consecutive quarterly increase. The trend may be nearing an end though. Over the same time period, new credit extensions for auto loans and mortgages slowed and the number of new credit inquiries over the previous six months fell to the lowest level — fewer than 145 million — since the Fed's database began in 2003.

Have Americans concluded that they have too much debt? And maybe more importantly, is that a good or bad omen?

Good News, Bad News

Credit inquiries are credit report requests from lenders, also known as "hard pulls." Lenders use hard credit pulls to evaluate the risk of extending credit or loaning money to you. If credit inquiries decline, total approvals for new credit should decline as well.

For reference, there were more than 218 million credit inquiries in Q1 2003. From Q3 2007 to Q3 2010, the Great Recession knocked quarterly inquiries down to approximately 150 million. Credit inquiries slowly rose until Q3 2015 but have declined since then, resulting in the new record low.

Economists estimate that somewhere around two-thirds of our economy is driven by consumer spending, which is in turn mostly driven by credit — not many Americans spend on a fully cash basis, unless they are forced to because they can't get credit. Fewer credit requests could mean fewer new loans and credit cards issued, and therefore less spending to drive America's economy.

Credit requests aren't directly tied to spending. For example, credit requests could be disproportionately denied, or fewer credit users could be overspending, raising the overall debt total, but other information supports a true drop in credit demand.

A separate Federal Reserve bank survey in February found that 25 percent of banks showed weaker demand for loans, with only 4 percent reporting stronger demand. Meanwhile, the American Bankers Association (ABA) reported in January that new credit card accounts between July and September of 2018 dropped by 6 percent.

The Fed Quarterly Report shows that slightly over 200 million new accounts were opened over the last twelve months, but approximately 225 million accounts were closed over that same period. Average delinquency rates are still high at 4.7 percent, but at least they are staying stable.

That may be a gloomy forecast for the American economy, but it's good news for average American households. It suggests that we are slowing debt growth and improving fiscal responsibility – bringing household debt and spending toward a healthier balance.

Debt Has Momentum

Given the above findings, why hasn't debt already declined?

Auto loans and credit card limits are taking up some of the slack. The Fed report cites the dollar value of newly originated auto loans as the highest since auto loan data tracking began nineteen years ago, while aggregate credit card limits hit a new high for the 24^th consecutive quarter.

Interest rates also add to our debt total. To actually decrease household debt, Americans will not only have to reduce their new loans and credit spending, they must also pay off a portion of existing debt each month just to neutralize interest charges.

Interest charges give debt momentum to grow. Recent interest rate increases help to accelerate debt growth. You can reverse that momentum in your own case by limiting use of existing credit accounts, paying ahead on existing loans, and keeping inquiries for new credit to a minimum.

The Takeaway

What's your household debt situation? If you're in a personal trend of debt increases, it's time to revisit your budget.

Is your debt increase from overspending, or have unexpected expenses put you over your budget limits? In either case, cut or delay spending so you can reach a monthly surplus. Apply that surplus toward reducing your debt.

Keep your credit score high through on-time payments and limited use of credit, and look for opportunities to lower interest rates on current and future debts as your score increases. Meanwhile, keep an eye on all accounts and check your credit report regularly to look for any signs of fraud. You have enough debt on your own – you don't need any help from identity thieves.

A temporary debt increase is fine within a long-term plan. Your eventual goal should be zero debt. Let the rest of us stimulate the economy for a while. You've done your part.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

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