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The Federal Reserve recently released its consumer credit report, which shows that US consumers increased their total debt by $6.3 billion in the month of April 2011, an increase of just over 3% sequentially.[1] It was the seventh consecutive rise in consumer credit and about $1 billion more than the predicted increase by the Wall Street economists.[2] The Fed’s data show that there was a 5.3% increase in non-revolving debt, which typically includes student loans and car loans. This can be particularly encouraging for Discover Financial (NYSE:DFS), a dominant player in the student loan market, as well as other financial firms like Capital One (NYSE:COF), American Express (NYSE:AXP), Visa (NYSE:V) and MasterCard (NYSE:MA).

(Chart created using Trefis' app)

While there was a just north of 5% increase in non-revolving debt, revolving debt (like credit card debt) decreased by 1.4% during April, which indicates that higher borrowing is a result of economic hardship rather than economic rebound. In tough economic times with a high unemployment rate, people prefer to go back to school to improve skills. A decline in revolving credit also indicates that people remain reluctant to incur credit card debts especially when prices for food and gasoline are on the rise.

An increase in the demand for student loans will help Discover improve its student and personal loan portfolio, which stood at $4.3 billion in 2010 and, according to our estimate, this will increase to $5.1 billion this year and over $15 billion by the end of our forecast period.

Notes:

  1. Consumer Credit, Federal Reserve Statistical Release
  2. UPDATE 2-US consumer credit climbs in April for 7th month, Reuters

Disclosure: No positions

Source: Fed Consumer Credit Report Lifts Discover's Prospects