July data from the Fed showed that consumer credit fell by a record-breaking $21.6 billion that month to reach $2.47 trillion.
The 10.4 percent annualized drop reflected the sixth consecutive month in which consumer credit contracted – a sign that many analysts say does not bode well for the economic recovery of the nation.
“There is no way that this recovery can be sustained unless we see a pickup in household spending,” economist Bernard Baumohl told CNN Money.
He added that consumers are likely to “be in the background” when it comes to boosting the country’s economy this year.
The Fed’s figures showed that revolving debt – a category which includes credit card debt – decreased by $6.1 billion in July. Meanwhile, non-revolving debt – including auto loans – plummeted by $15.4 billion.
At least part of the contraction in consumer credit can be chalked up to stricter lending standards at banks.
Last month’s survey of senior loan offers by the Federal Reserve showed that while fewer respondents said they were tightening their criteria for credit cards, nearly half (48 percent) had slashed credit limits for some borrowers as a way to protect themselves against risk.
Experts say the trend of cutting limits is not likely to diminish until February, when new credit card legislation takes effect.
“Issuers are experiencing increased charge-offs and defaults by customers who are severely delinquent,” consumer advocate Gerri Detweiler told the Sacramento Bee.
She suggested that customers with good credit scores and a sound borrowing history may be able to get their credit line reinstated by negotiating with their card issuer.
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