Home > Personal Finance > Consumer Credit Jumps, Bankruptcies Plummet (At Least for Now)

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Is your credit card feeling tired these days? Americans took on a massive amount of new credit card debt and other kinds of loans in November, according to a new report published by the Federal Reserve.

Total revolving debt, which mostly means credit cards, spiked by 8.5 percent in November. Nonrevolving debt, which includes things like car and student loans, grew even faster, with a 10.7-percent increase during the month—for a total of $20.4 billion. Overall, consumers now carry $2.48 trillion in debt, not counting mortgage debt.

“Yes, that’s a big jump,” says Robert Lawless, a law professor and consumer credit expert at University of Illinois. “More common increases are about two percent.”

But now is an especially volatile time for borrowing and lending. Total revolving credit dropped 9.6 percent in 2009 and 7.5 percent in 2010, but then appeared to stabilize so far this year, according to the Fed report. It grew by a single percent in October, before jumping the following month.

What does this mean for consumers’ financial health? Surprisingly good things, at least in the short term, Lawless says. According to a study he published in 2006, increases in consumer credit actually lead to decreases in the number of consumers declaring bankruptcy.

The latest numbers appear to confirm the trend, which Lawless says extends back to the Great Depression. November’s increase in consumer credit was followed by a larger-than-normal decrease in the number of people declaring bankruptcy. Just over 4,500 Americans filed for bankruptcy in December 2011, a 12.1-percent decrease from December 2010, according to research Lawless posted recently on his blog creditslips.org.

Why this surprising result?

“I’m not entirely sure why that is, but my supposition is that more people are able to borrow as an alternative to bankruptcy,” Lawless says.

But getting a loan to avoid bankruptcy now may just exacerbate the problem later. Within two or three years of a big consumer credit spike, the number of bankruptcies often starts rising again.

“That’s the paradox of consumer credit,” says Lawless. “In the short run, bankruptcy does go down when credit goes up. But bankruptcy takes time and money. So over time, bankruptcies will eventually rise.”

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