The Federal Reserve reported yesterday that U.S. consumer credit dropped by a record $21.6 billion in July as Americans continue to pay down debt and delay big purchases that may have previously been financed.

The July decline is the largest on records dating back to 1943, according to the Federal Reserve.  The $21.6 billion decline in consumer credit came as a surprise since economists were predicting just a $4 billion drop in July following the $15.5 billion decline in June.

Working down debt in order to get American’s personal balance sheets in order is a key step in eventual growth.  Unfortunately this trend may weigh on the economy until complete as consumer spending accounts for roughly two thirds of America’s economic activity.  

The hesitation to take make purchases that require additional financing is clear when looking at non-revolving debt, which is the type of debt generally used to finance purchases of automobiles, vacations and to pay college tuition.  According to the Fed’s reports non-revolving debt shrunk by $15.4 billion.  That decline also marks a record and is an 11.7 percent drop from July 2008.

What’s more is the fact the last week of July benefited from the government’s “cash for clunkers” program, which gave a bump to the number of auto loans taken out during the month.  Though non-revolving debt shrunk overall, auto loans did see a 2.4 percent increase in total dollars finance in July. 

Credit card debt continued to fall as well.  The report showed that revolving debt decline by $6.4 billion in July, representing a decline of 8 percent compared to a year ago.

Consumers are not the only catalyst in the declining credit trend; ever since the housing crash and credit crisis, banks have drastically raised their requirements for mortgages in order to prevent adding any additional bad debt to the massive charge-offs already lined up from sour home loans.

All told, consumer credit dipped by 10.4 percent in July, which is the largest year-over-year percentage decline since 1975.  Total U.S. consumer debt now stands at $2.46 trillion.