APRIL 2004

Major Holders and Types
of Consumer Credit Outstanding,
Year-End 2000 and the 3rd Quarter of 2003
(Billions of dollars; quarterly data are seasonally adjusted annual rates.)

The table below shows the major changes that occurred in the consumer and mortgage credit markets between the end of 2000 and the end of October 2003. The purpose of the table is to provide a long-term analysis of the basic shifts in the types of firms providing (1) closed-end, or non-revolving credit, such as automobile and home mortgage loans, and (2) open-end or revolving, such as bank or retail credit cards. Over the 34-month period shown in the table below, total consumer credit outstanding rose by 18.2 percent. The rate of increase in nonrevolving, or closed-end credit outpaced that of revolving credit, 21.9 percent vs. 12.4 percent.

What accounts for this significance difference in the growth rates of closed-end and open-end credit during this period? The difference is largely explained by the fact that, in an improving economy, consumers are likely to use installment credit to invest in durable goods, such as homes and automobiles. In many cases, consumers had postponed these purchases during the recession. These installment loans are more sensitive to the stage of the business cycle than revolving credit used by consumers to buy goods and services with their credit cards. Commercial banks generally offer both revolving and closed-end credit, while finance companies are more likely to use closed-end credit to finance the purchase of "big ticket" items. The demand for these items is generally more volatile over a business cycle than the demand for shoes and hats. Consequently, we would expect that during this recent period of recovery, nonrevolving credit would increase more rapidly than revolving credit. The data support this theory. There is, of course, an additional reason that growth in revolving credit outstanding has lagged installment credit growth. The huge boom in mortgage refinancings during this period undoubtedly rolled large amounts of credit card debt into first and second mortgage loans. Of the two types of consumer debt, we speculate that revolving debt was most likely to be consolidated into mortgage loan.

Source: Statistical Supplement to the Federal Reserve Bulletin, February 2004, p.34.