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Economic Snapshot: Consumer Credit

Friday, October 1, 2010

1. What two types of credit are represented in total consumer credit in the graph below?

The types of consumer credit represented are revolving and nonrevolving.

2. What is revolving credit?

Revolving credit is a line of available credit that is usually designed to be used repeatedly, with a preapproved credit limit. The amount of available credit decreases and increases as funds are borrowed and then repaid. The borrower makes payments based only on the amount actually borrowed plus interest. The borrower may repay in full at any time or over time — subject to any minimum payment requirement. Periodic finance charges are computed on the unpaid balance, and the minimum payment is usually a percentage of the balance due. Common types of revolving credit include credit cards and home-equity lines of credit.

3. What is nonrevolving credit?

Nonrevolving credit is a type of an installment loan, which is given in a lump sum for a specific purchase or investment. The loan is paid back with regularly scheduled payments, which include interest. Examples of nonrevolving credit include home loans, car loans, and business loans.

Economic Snapshot

SOURCE: FRED (Federal Reserve Bank of St. Louis, Federal Reserve Economic Database)

4. What happened to the amount of revolving and nonrevolving credit during the most recent recession?

The amount of revolving credit began to decline (and continues to decline), and nonrevolving credit flattened or remained relatively the same during the recession.

5. Why do you think the amount of revolving credit would decline during a recession but the amount of nonrevolving credit would remain steady?

When people are worried about unemployment, they can adjust their credit-card balance relatively quickly by simply not making credit-card purchases. With nonrevolving credit, such adjustments aren’t so easy. Home mortgages and car loans are long-term loans that take a while to pay off, so people cannot adjust quickly to personal financial problems by reducing these loans.

Second Quarter 2010

  Q3-’09 Q4-’09 Q1-’10 Q2-’10
Growth Rate
Real Gross Domestic Product
1.60% 5.00% 3.70% 1.7%*
Inflation Rate
Consumer Price Index
3.70% 2.60% 1.50% -0.70%
Civilian Unemployment Rate 9.60% 10.00% 9.70% 9.70%

*Third estimate for GDP
Bureau of Economic Analysis: