"February's decline reflects on the still dire state of the economy," said Yasmine Kamaruddin, an economic analyst at Wells Fargo.
"Even if we have seen retail sales and personal expenditure increase in past months, we haven't seen these gains translate into the use of credit because consumers faced with unemployment and slow wage and salary growth are still shying away from taking on credit," she added.
The decline was led by a 13% annual rate drop in revolving credit, which includes credit card debt.
"It looks as though the credit card market is still in the doldrums," said Kamaruddin. "Commercial banks significantly decreased their holding of revolving credit in February, indicating a charge-off on their parts."
Nonrevolving credit, which includes car, student and personal loans, also fell. It declined by $2 billion, or a 1.6% annual rate, to $1.59 trillion.
January's figure was upwardly revised to show an increase of $10.6 billion in total consumer borrowing from December. The Fed had previously reported a $5 billion rise in January, the first increase in a year.
"The pop last month didn't really reflect the consumer," said Kamaruddin. "It was really due to the federal government's holding of nonrevolving credit, since they were buying up more student loans from private lenders."
Therefore, Kamaruddin expects consumer credit to return to its downward trend and continue to edge lower throughout the year.
"I expect more declines, but smaller declines, as we progress throught the recovery," she said. "We'll have to wait for employment prospects to improve and be sustained before consumers will feel confident enough to build up credit and purchase more."
Last week, a report from the Labor Department showed that the U.S. added 162,000 jobs in March, while the national unemployment rate remained unchanged at 9.7%.
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