Simone Baribeau A good time to pay down your credit card

Interest rates are low. Consumer borrowing, however, is still expensive. So what are consumers doing?

Paying down their debt, says a report put out today by the St. Louis Fed. Households have reduced credit card debt by 3.5 per cent and mortgage debt by 2 per cent. The Economic synopses, written by William T. Gavin, St. Louis Fed Vice President, credits the spreads between interest paid on consumer savings (which is held down by low interest rates) and the cost of consumer borrowing (which remains relatively high.)

“Because interest rates on savings are so low, households have ‘saved’ by paying down credit card and mortgage debt.”

Of course, an alternative explanation is that the reduced mortgage debt (which has experienced its first year-on-year decline) is due to falling housing prices. Short sales and foreclosed properties being bought at less than the mortgage value may be pulling down the household debt number. And other data out today were a stark reminder of the affects of the housing crash: in the US the homeownership rate in the fourth quarter of 2009 is now at its level in 2000, before the housing boom.

On the credit card side, consumers facing lower credit ceilings may have been pushed into paying off some of their outstanding balances.

Still, the consumer loan spread graph makes a good argument for paying down debt now. Note credit cards are at their highest spread in a decade.