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Even with new credit card laws 2010, Americans are cutting back on credit

New laws are shielding American credit-card users – as long as they can get credit.

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Aja Jackson, of Quincy, Mass., cut up her last credit card about two years ago and now only pays using cash and debit. Just as new credit-card laws offer consumers new protections, the recession is causing them to cut back on their use.

Sarah Beth Glicksteen / The Christian Science Monitor / File

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After Monday's new credit card laws take effect, card issuers can no longer jack up interest rates on existing balances, for example. But those balances have been plunging over the past year.

It’s a sign that, although the new law may be a win for consumers, it comes as the amount of credit available appears to be shrinking.

“At some point purse strings will loosen a bit on credit,” says Greg McBride, a senior financial analyst at Bankrate.com, which tracks borrowing options for consumers. “But the qualification standards have changed.”

The tightening of credit is something that typically accompanies recessions, he notes. And a return to some of the lax lending standards that existed before the recession would not be good for borrowers or banks.

At the same time, however, the contraction of credit in the past two years has been unusually severe. Many economists say the strength of an economic recovery will depend on how fast credit starts to flow in a normal way.

Consider this: Until the past year, the amount of revolving consumer credit (essentially credit cards) has risen for three decades through thick and thin. Even in the recessions of 1981, 1991, and 2001, the trend stayed positive, according to Federal Reserve data plotted by averaging the most recent three months and comparing them to the same period a year earlier. But for the recession that began in 2007, this number has dived below zero into outright decline. The most recent plot on the chart, from Wells Fargo Securities, shows revolving credit declining at nearly a 10 percent annual rate.

The decline has several causes. Some borrowers are moving to pare their debt load, while others defaulted on their debt because of a job loss. Banks, facing a surge in delinquent loans, scrambled to reduce their risks by closing down credit accounts or imposing tighter limits on borrowing.

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