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Rebates helped drive May credit card spree

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Associated Press / July 9, 2008

WASHINGTON - Consumers boosted their borrowing in May, mostly reflecting heavy credit card use to finance their purchases.

The Federal Reserve reported yesterday that consumer credit increased at an annual rate of 3.6 percent in May, roughly the same pace as logged in the prior month.

The pickup pushed total consumer debt up by $7.8 billion to $2.57 trillion. That was a bit more brisk than the $7 billion over-the-month increase economists were expecting.

The increase was led by much stronger demand for a category called revolving credit, which is primarily credit cards. Use of revolving credit rose at a 7.1 percent pace in May, a month where a flow of tax rebates helped to energize consumer spending. In April, consumers cut back on such credit at a 0.5 percent pace.

Still, the longer-term trend shows that consumers have been forced to charge more of their purchases on credit cards as banks have tightened lending standards on other types of loans.

Demand for nonrevolving credit used to finance cars, education, and other things, meanwhile, slowed to 1.6 percent in May. That was down from a growth rate of 6.1 percent in April and was the slowest since December.

The Fed's measure of consumer borrowing does not include any debt secured by real estate, such as mortgage or home equity loans.

Economists closely watch consumers' behavior because their spending accounts for a big chunk of overall economic activity.

So far, economic growth in the April-to-June quarter is shaping up to be better than analysts had initially anticipated. However, there's growing concern that many people will pull back on their spending later this year when the bracing effect of the rebates fades.

Between January and March, major banks and other lenders suffered massive credit-related losses and set billions of dollars aside to prepare for more deterioration in the ensuing months.

Bank of America, Citigroup Inc., Capital One, JPMorgan Chase & Co., and other lenders have been raising minimum credit scores for various loan applications.

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