Consumers borrow more in Oct. as economy improves. (AP)

WASHINGTON – Americans stepped up their borrowing in October to buy cars and attend college, and they also charged a little more to their credit cards. The second straight monthly gain in overall borrowing suggests consumers are growing more confident in the economy ahead of the crucial holiday buying season.

Total consumer borrowing rose by $7.6 billion, the Federal Reserve said Wednesday. September and October's gains reversed a steep drop in borrowing from August, when it fell by the most in 16 months.

The October increase reflected a 5.3 percent increase in borrowing in the category that includes car and student loans, much of it federally funded. The category that covers credit card purchases rose 0.6 percent, which matched September's gain after a revision.

Borrowing has increased in 11 of the past 12 months. But credit card use has increased only six times in the past two years. It declined in both July and August, when many Americans were worried about the economy and more cautious about taking on high-interest debt.

That may be changing. The economy grew at an annual rate of 2.5 percent in the July-September period, nearly three times the growth rate in the first six months of the year. Most economists expect similar growth in the final three months of the year.

Consumers are spending more freely and their confidence is on the rise again. In November, the unemployment rate fell to 8.6 percent, the lowest point in two and a half years. The economy has generated 100,000 or more jobs five months in a row — the first time that has happened since April 2006.

Still, economists worry that the spending gains may be temporary because wages are barely keeping pace with inflation. Some caution that borrowing may be rising because people are earning less.

"Many Americans had to break out the plastic in the past couple of months since disposable income, adjusted for inflation, was in negative territory for each month in the third quarter," said Chris Christopher, senior economist at IHS Global Insight.

Without more jobs and higher pay, consumers may be forced to cut back on spending. That would slow growth. Consumer spending accounts for about 70 percent of economic activity.

Economists also fear Europe's debt crisis will lead the continent into a recession, which would also hamper U.S. growth. And if Congress doesn't extend the Social Security tax cut and emergency unemployment benefits by the end of this month, $165 billion in potential spending could be sucked out of the economy next year.

Households began borrowing less and saving more when the country fell into a recession and unemployment surged. While economists believe Americans will gradually increase borrowing in coming months, they do not expect consumers to load up on debt the way they did during the housing boom.

Americans felt wealthier then and were more willing to take on added debt because of the soaring value of their homes.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

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Consumers get scant relief from debt deal (AP)

By DAVE CARPENTER, AP Personal Finance Writer Dave Carpenter, Ap Personal Finance Writer – Mon Aug 1, 6:34 pm ET

Just like their government, consumers and individual investors will avert immediate disaster if the debt ceiling agreement wins congressional approval by Tuesday. The stock market shouldn't crash and interest rates won't start skyrocketing.

But even before a vote took place, it was clear the deal carries implications for Americans' borrowing, spending and investments.

By slashing government spending more than $2 trillion, state and local governments may face greater pressure to raise taxes and cut jobs. That would only make it tougher for struggling individuals to make ends meet and find work.

And because the compromise stopped short of immediately implementing the more sweeping changes that had been sought, ratings agencies could still downgrade the U.S. credit rating in the coming months. That could jolt investor confidence, prompt markets to drop and make loans more expensive and harder to get.

For consumers, the accord provides no relief from economic reality, said Jack Ablin, chief investment officer for Harris Private Bank in Chicago.

Although the immediate consequences of the agreement may be limited, the deal puts the pressure back on a stagnant economy with little prospect for significant improvement any time soon.

"We're back to the same things we've been worrying about for the past couple of years," said Greg McBride, senior financial analyst for Bankrate.com. "Job growth is anemic, economic growth is uninspiring, and people have a lot of hesitation when it comes to things like job security and taking the plunge into homeownership."

The outlook for various areas of personal finance:

STOCKS

The short-lived nature of Monday's rally after a tentative agreement was announced underscores just how skeptical investors are in the face of weak economic data. After surging nearly 140 points at the opening, the Dow Jones industrial average tumbled on a surprisingly weak manufacturing report. It was down as much as 145 points before finishing the day down 11.

A "relief rally" of 2 to 3 percent, or roughly 200 points in the Dow, could still occur once a deal is formally passed, according to market pundits. But few foresee the market rising sharply beyond that until signs emerge of stronger economic growth.

"What happens from here is hugely problematic," said Michael Farr, chief investment officer of Farr, Miller & Washington, an investment firm in Washington, D.C. "If you look beyond this particular (debt-ceiling) issue, all of the rest of the news is bad -- GDP, unemployment and housing numbers."

The bright spot is corporate earnings. Even if many corporations are keeping large amounts of cash on the sidelines, awaiting a recovery, their strength gives investors some reassurance that the market won't collapse again like it did during the 2008 financial crisis.

BONDS

If Congress raises the debt ceiling no later than Tuesday, a potential default will be avoided but a downgrade could remove the nation's gilt-edged AAA debt rating. Credit rating agencies Standard and Poor's and Moody's declined to comment Monday about the bill's possible impact on their decision-making process.

If it does come to pass, a downgrade could send Treasury yields modestly higher, with corporate, municipal and other bond issues doing the same. A downgrade means the government would have to pay investors more to take on the additional risk of buying its bonds.

Municipal bonds also could face pressure from the government spending cutbacks, which will increase the crunch for cities and local governments.

LOANS

A downgrade would nudge interest rates higher on a variety of consumer loans. Not only would Uncle Sam have to pay higher borrowing rates, so would everyone else. That's because many interest rates are pegged to U.S. Treasurys. So if a downgrade pushes up Treasury rates, mortgage, corporate and other loans would rise too.

• Home loans: Already-tight restrictions on lending could get tighter. Some borrowers could find it even more difficult to get approved for a mortgage.

Home-loan borrowers have been feeling the squeeze. For example, an Ohio woman with a portfolio of $2 million had to go to 10 banks before finding one that would approve her request for a simple mortgage refinancing, according to financial planner John Ritter of Ritter Daniher Financial Advisory in Cincinnati. A routine issue can negate the value of a large portfolio in the eyes of a lender.

"I don't think it's going to get any easier any time soon," Ritter said. "The creditworthiness that wasn't even looked at before is now really stringent."

The upside for prospective homebuyers: Any increase in interest rates could be partially offset by a drop in home prices. When mortgage rates rise, buyers are willing to pay less for a house.

The rates on home equity lines of credit could also climb.

• Student loans: The debt deal increases funding for Pell Grants, which provide up to $5,550 for low-income students. But the amount will still fall short of what's needed, leaving the program at risk of future cuts, according to Mark Kantrowitz, publisher of the FastWeb and FinAid websites about college aid.

If the U.S. credit rating is downgraded, interest rates would likely rise by 0.25 percent to 1 percent on existing private student loans and more on new private student loans, according to Kantrowitz. That would push up monthly loan payments anywhere from 5 percent to 12 percent depending on the duration of the loan.

For example, someone paying off $25,000 in student loan debt at 10 percent interest over 10 years could see payments rise from about $330 a month to $344, with an extra $1,680 in interest costs over the life of the loan.

• Credit cards: Higher costs on credit cards are not imminent, but rates could creep higher if there is a downgrade.

The federal credit-card act prevents rate hikes on existing balances. But interest rates would go up for most people on new charges if a downgrade leads to higher borrowing costs for banks.

The collective impact of higher loan costs goes beyond the individual loans, as McBride noted. "The more money that individuals are devoting to interest charges on credit cards and home equity loans and student loans, the less available to be spent elsewhere."

However, almost none of the spending cuts in the compromise plan would occur before 2014.

MONEY MARKET FUNDS, CDs

A downgrade would not force money-market funds to sell their Treasurys, so they should remain stable. Although these funds are required to own only high-quality securities, a downgrade wouldn't force an immediate sell-off.

The problem for retirees and others who depend on fixed income from these investments is that their returns continue to be meager. Even the best rates available nationally barely top 1 percent for a money-market fund or a one-year CD and are only 1.8 percent for a three-CD, according to Bankrate. That scenario isn't likely to change much in the near future, even if higher interest rates ultimately are coming.

"Retirees would love to have CDs that pay 3 percent or more," said Rob Russell, president of Dayton, Ohio-based investment firm Russell & Co. But the other side of that, he said, is that consumer loans will be considerably costlier once that happens.

TAXES

The legislation that congressional leaders agreed on does not include automatic federal tax increases. But the Bush tax cuts, extended once already, expire in 2013. Unless extended again, taxes would rise.

State and local taxes, as noted, also could be bumped higher as governments cope with the reality of less money available from Washington.

UNEMPLOYMENT

The deficit deal leaves out extended unemployment benefits for victims of the recession. President Barack Obama had pushed to extend them beyond their scheduled expiration next January.

With spending restricted, the government also would have less available to pump into programs directly aimed at creating jobs to stimulate the economy.

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Consumers borrowed more for 8th month in May (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Fri Jul 8, 4:16 pm ET

WASHINGTON – Americans took on more debt in May and used their credit cards more for only the second time in nearly three years. Consumers stepped up their borrowing just as the economy began to slump and hiring slowed.

The Federal Reserve said Friday that consumer borrowing rose $5.1 billion in May, the eighth straight monthly increase. It followed a revised gain of $5.7 billion in April. Borrowing in the category that covers credit cards increased, as did borrowing in the category for auto and student loans.

The overall increase pushed consumer borrowing to a seasonally adjusted annual level of $2.43 trillion in May. That was just 1.7 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Borrowing is a sign of confidence in the economy. Consumers tend to take on more debt when they feel wealthier. That boosts consumer spending. Ultimately, it gives businesses more faith to expand and hire. But an increase in credit card debt can also be a sign of people falling on harder times.

The economy added just 18,000 jobs in June, the fewest in nine months, the Labor Department said Friday. It was the second straight month of feeble job growth. The unemployment rate rose to 9.2 percent, the highest rate of the year.

Economists have said that temporary factors, in part, have forced some employers to scale back hiring plans. High gas prices have cut into consumer spending, which fuels 70 percent of economic activity. And supply-chain disruptions stemming from the Japan crisis have slowed U.S. manufacturing production.

The increase in credit card borrowing marked only the second monthly gain since August 2008. Households began borrowing less and saving more when unemployment spiked during the Great Recession. Many have resisted pulling out their credit cards in the two years since the downturn ended. Even with the May increase in credit card debt, this category is down 4.4 percent over the past year and 18.5 percent from its peak in August 2008.

High unemployment, slow wage growth, and a weakening housing market have forced people to be more frugal. Analysts believe the rise in student loans reflects the slumping economy: more people who have lost jobs have returned to school to get training for new careers.

Most analysts had thought the economy would pick up in the second half of this year. Manufacturing output has shown signs of reviving and auto factories in Japan have resumed production. And gas prices have come down a little. The national average for gas on Friday was $3.59 a gallon, down from a peak of nearly $4 in early May.

But a weaker job market, plus the slumping housing market and fears of the fallout from a European debt crisis, could weigh on the economy for the rest of the year.

Peter Newland, an economist at Barclays Capital, said consumer borrowing would show gradual gains in coming months. But he said the modest gains were "unlikely to be a strong driver of consumer spending for some time to come."

Economists don't expect consumers to load up on debt the way they did during the housing boom. During that period, Americans felt wealthier and more willing to take on increased debt because of the soaring value of their homes.

The Federal Reserve's borrowing report includes auto loans, student loans and credit cards. But it excludes mortgages and loans tied to real estate.

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Consumers borrowed more for 7th straight month (AP)

WASHINGTON – Americans borrowed more money in April for the seventh straight month, but they cut back on using their credit cards.

Consumer borrowing rose by nearly $7.2 billion, fueled by greater demand for school and auto loans, the Federal Reserve said Tuesday. A category that measures credit card use fell for the second time in three months. It has risen only twice since August 2008, the height of the financial crisis.

The 3.1 percent overall increase pushed consumer borrowing to a seasonally adjusted annual level of $2.43 trillion, just above the nearly four-year low of $2.39 trillion hit in September.

The report includes auto loans, student loans and credit cards, but excludes mortgages and loans tied to real estate. The Fed will give a more complete picture of Americans' debt on Thursday when it issues its quarterly report on household net worth.

Households began borrowing less and saving more to cope with the recession, which ended in June 2009. Credit card use has plummeted nearly 19 percent over the past 20 months and it has dropped 5 percent over the past year.

Overall borrowing has increased in recent months. But analysts say the reason for that is also a reflection of the weak economy: the gains have been driven by more people borrowing money to attend school — many of whom are out of work.

High unemployment, steep gas prices and a weakening housing market have also forced people to resist reaching for their plastic.

"When you take out student loans, you're still seeing credit card use, and borrowing overall, falling," said Paul Dales, chief U.S. economist at Capital Economics. "That's a sign about how people view the economy."

Most economists say borrowing will increase this year. But they don't expect consumers to increase their debt in the way they did during the housing boom.

During that time, Americans felt wealthier because of soaring home values. When home prices fell, they cut back on borrowing. And they slashed further after job losses mounted and many people struggled to get their debt under control.

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Consumers borrow more for student loans, new cars (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Thu Apr 7, 4:49 pm ET

WASHINGTON – U.S. consumers borrowed more money in February to buy new cars and attend school, but they cut back on using their credit cards to make purchases.

Borrowing increased by $7.6 billion, or 3.8 percent, in February, the Federal Reserve said Thursday. It was the fifth consecutive monthly gain.

All of the strength in February came in the category that includes car loans and student loans. That increased 7.7 percent. Borrowing in the category that covers credit cards fell 4.1 percent. That has risen only once in the more than two years since the 2008 financial crisis peaked, a cautionary sign for an economy in which consumer spending drives 70 percent of growth.

Still, Mark Zandi, chief economist at Moody's Analytics, said it may actually be a good thing that fewer Americans are charging goods on their plastic.

"I think households have done a good job of getting their financial books in order and that will lay the foundation for more prudent borrowing going forward," Zandi said.

The gains pushed total borrowing up to a seasonally adjusted annual rate of $2.42 trillion in February. That's 1 percent from the three-year low hit in September.

Households began borrowing less and saving more as they struggled to cope with the severe 2007-2009 recession. But economists expect that the period of belt-tightening is ending. They see consumer spending being supported this year by increased borrowing, rising employment and the Social Security tax cut that is giving households more after-tax income to spend.

The Fed's monthly consumer credit report covers auto loans, student loans and credit card financing but excludes loans secured by real estate such as mortgages and home equity loans.

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Consumers still pay credit cards before mortgages (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – Wed Mar 30, 6:57 pm ET

NEW YORK – It's not just mortgages that are upside down.

People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.

Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.

Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.

In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.

The reversal from traditional payment habits reflects the steep drop in home values and the spike in unemployment.

"As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.

Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country — in the third quarter of 2007.

The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

With tighter regulations making it difficult to manage the accounts of risky customers, banks will now shut a card down if a consumer misses one or two payments. By six months, the account is written off as uncollectible.

In contrast, it can take a year or more after the first missed payment before a house is foreclosed. That gives people who fall behind more time to try to solve their financial problems, said John Ulzheimer, president of consumer education at SmartCredit.com.

It's also easier to keep current on credit cards when times get tight. "The minimum payment on a credit card is a heck of a lot lower than a mortgage," Ulzheimer noted.

The question now is whether credit cards will remain a higher priority for cash-strapped consumers.

TransUnion found in a recent survey that consumers say they would pay their mortgages first if it was possible to make only one of the two payments. But the data show that behavior doesn't reflect those intentions.

Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

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Consumers still pay credit cards before mortgages (AP)

By EILEEN AJ CONNELLY, AP Personal Finance Writer Eileen Aj Connelly, Ap Personal Finance Writer – 31 mins ago

NEW YORK – It's not just mortgages that are upside down.

People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.

Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.

Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.

In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.

The reversal from traditional payment habits reflects the steep drop in home values and the spike in unemployment.

"As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.

Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country — in the third quarter of 2007.

The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

With tighter regulations making it difficult to manage the accounts of risky customers, banks will now shut a card down if a consumer misses one or two payments. By six months, the account is written off as uncollectible.

In contrast, it can take a year or more after the first missed payment before a house is foreclosed. That gives people who fall behind more time to try to solve their financial problems, said John Ulzheimer, president of consumer education at SmartCredit.com.

It's also easier to keep current on credit cards when times get tight. "The minimum payment on a credit card is a heck of a lot lower than a mortgage," Ulzheimer noted.

The question now is whether credit cards will remain a higher priority for cash-strapped consumers.

TransUnion found in a recent survey that consumers say they would pay their mortgages first if it was possible to make only one of the two payments. But the data show that behavior doesn't reflect those intentions.

Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

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