In a recent Bloomberg article, discussions of consumer debt declining woke up many debt-ridden families to wonder what they were doing wrong.  The pace of borrowing by US consumers fell in December for the fourth time in five months as the deepening recession and restrictions on bank lending crimped purchases.   Consumer credit fell by $6.6 billion, or 3.1 % at an annual rate, to $2.56 trillion, according to a Federal Reserve report released today in Washington. In November, credit decreased by $11 billion, more than previously estimated and the biggest drop since records began in 1943. Many Americans are losing their homes to foreclosure, but as their spending habits decrease, so have their debts.

Borrowing may shrink further with banks continuing to make it harder to get loans as they grapple with mounting losses and write-downs. Demand for credit is also sliding after consumer spending, which accounts for about 70 % of the economy, posted a record six months of declines.   “The situation is ugly and will only get uglier,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “Businesses are slashing jobs at an accelerated pace, and consumers are retrenching just as fast. The economy is in a freefall, and the severe contraction in credit underscores the crisis.”

Before today’s release, economists forecast consumer credit would drop $3.5 billion in December, according to the median of 30 estimates in a Bloomberg News survey. The Fed initially reported a $7.9 billion decrease in consumer borrowing in November.   Get more debt news as it posts.

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