Credit Use Drops in May for First Time Since July, ’82 : The Fed Says Major Reason Is More Home Equity Loans

WASHINGTON — Americans cut their credit use in May, reducing the total of outstanding consumer debt by a seasonally adjusted $557 million in part by turning to increasingly popular home equity loans, the Federal Reserve Board said.

The rate of decline in consumer debt for May, 1.1% at an annual rate, was the largest since a 4.5% decline in July, 1980. Outstanding credit was initially reported falling $63 million in March but that was revised to a $322-million gain.

At the same time, the Fed revised upward its estimate of consumer borrowing during April. Originally pegged at $2.93 billion, net consumer borrowing during the month actually was $3.68 billion, a $750 million change.

The Fed said the growth in installment credit has slowed sharply over the first five months of the year. Through May, installment debt has been increasing at an annual rate of only 2.25%, down from a 10.5% rate of increase in the comparable 1986 period.

Auto credit, for example, declined in May by $155 million after rising in April by $1.37 billion. Revolving or credit card debt increased only by $108 million in May after a $1.5-billion rise in April.

The Fed noted that a major reason for the change was the increase in popularity of home equity loans. The loans are roughly similar to a second mortgage in which the lender’s collateral is the equity in the borrower’s home. But analysts also have been saying for months that consumers were cutting back on their spending.

Unlike other types of borrowing, the interest on home equity loans is deductible from income tax liabilities. New tax laws effective Jan. 1 removed the provision for income tax deduction for interest expense on most other types of borrowing.

The Federal Reserve Board’s monthly release on consumer credit does not record real estate-related borrowing.

The Fed said the category that includes bank and credit union loans not secured by real estate showed a decrease of $367 million after a $756-million increase in April, and borrowing for mobile home purchases fell $142 million.

The total of outstanding debt owed by consumers at the end of May was $580.1 billion on a non-seasonally adjusted basis, the Fed said, compared to $543.9 billion at the end of May, 1986.