For what seems like ages financial gurus have been lamenting that consumers rely too much on credit cards, and finally people have begun to listen — all it took was a failing economy! The Federal Reserve announced on Tuesday that consumer borrowing fell in August for the first time since 1998 and that was before the crisis worsened in September. Consumer borrowing is defined as loans not secured by real estate, and auto loans and credit cards were the two areas that led to a decline in consumer credit.
Consumer spending, not to be confused with consumer borrowing, makes up two-thirds of total economic activity. Economists are worried this number will fall in the third quarter, something that hasn't happened since 1991. It's a confusing scenario with mixed messages — consumers need to save more in a tough economy, yet when we don't spend and stimulate the economy we risk damaging it further. Once we see improvements that make people more confident in the economy and feel more secure in their jobs, spending will naturally increase, but hopefully consumers have learned that living on credit cards is no longer a viable option.