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Economist: Cards Fuel Spending Despite Rising Costs    
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Consumer credit in the second quarter increased at an annual rate of 5%, and rose 5.75% in June, owing to brisk growth in revolving credit, according to the Federal Reserve. Although “we are starting to see borrowers come under pressure,” due to previous interest rate hikes and federally regulated minimum monthly payments on credit cards, “that has not deterred borrowing from credit cards, which are funding spending,” Scott Anderson, vice president and senior economist for Wells Fargo, told CCR this week.

After falling during the second half of 2005, credit card late payments increased to 4.40% in the first quarter 2006, from 4.27% (seasonally adjusted) in the previous quarter, according to the American Bankers Association‘s Consumer Credit Delinquency Bulletin.

Total outstanding consumer credit stood at over $2.18 trillion in the second quarter, nearly 2.8% above the same period last year. About $820.7 billion of that was revolving credit, the Federal Reserve report shows.

Anderson believes the upward trend in credit card spending may relate to rising interest rates on home equity loans and equity lines of credit, which are less attractive as a result.

In addition, “borrowers will begin to feel rate shock from the adjustable rate mortgages” they used to buy homes, which means “we could see continued strong demand on credit cards.”
Teaser rates on new card offers, such as 0% APR for the first six months, are proving very effective, Anderson says, and the pause in prime interest rate increases allows banks to offer such incentives.

Many consumers are still looking to consolidate their borrowings and transfer balances from higher to lower-rate cards. Banks that offer these teaser rates see it as an opportunity to take market share, the economist adds.
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