Thursday, December 2, 2010

11% of Credit Card Users, or 8M Americans, Stop Using Cards over Past Year

An interesting tidbit via this AP story about a quite tremendous drop off in credit card usage at least by % of population in the country.  Of the 70M users the previous year, 8M have dropped off the radar.  On first glance we might think this is due to 'seeing the light' but a lot of these statistics require further investigation.  For example, there were headlines over the past year about how much debt the U.S. consumer was "paying off" but when you dug into the numbers the reality was, the cause of this drawdown in debt at the aggregate level was almost entirely due to a huge swathe of people defaulting on debt.  Now does this still have the same effect in the long run? (people getting rid of debt) yes.  But not exactly via reasons we'd be clapping for.... and of course with far different consequences.  [The Fed keeping interest rates at 0% so banks can make money with their eyes closed for years, to offset the losses of masses of defaults]

Perhaps some of these 8M did see the light, impossible to tell - but I'd imagine a good portion of them were in other not so rosy scenarios, such as banks tightening standards and being locked out of the credit card game.  With that said, on an anecdotal level back in 2006-2007 I used to get 5-7 0% interest rate cards offers a week.... that disappeared for most of 2008-2009.  However, in the past month I've seen them return and have had 4 in the past 2 weeks show up.  America's back, baby?

  • More than 8 million consumers stopped using credit cards over the past year. About 62 million people now have an active card, compared with 70 million a year ago.
  • The decline stems from a combination of consumer choices and bank actions. An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year.
  • The Chicago company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off.  "One can quite reasonably infer that's not voluntary," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. Banks have written off record amounts of credit card balances in recent years.
  • But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. "They're simply either not purchasing as much or paying down balances."
  • Many of these individuals may have shifted to using debit cards. In the past several years the use of debit cards has grown steadily and now surpasses credit card use in both the number of transactions and dollar volume. Interest rate increases by credit card companies and reduced credit lines have contributed to that trend.

  • Still that doesn't mean consumers are shunning credit altogether. The average card balance stood at $4,964 in the quarter. That represented a slight increase from $4,951 at the end of the second quarter, and the first quarter-over-quarter increase in a more than a year.  Yet it also reflects a 13 percent drop from $5,612 at the end of Sept. 2009.
  • Becker said the balance increase from the second quarter is mostly an indication that consumers are still under stress. Prior to the recession, he said, carrying a credit card balance was more of a lifestyle decision reflecting spending choices. "Now it's out of necessity," he said. "In times of financial distress, nobody wants to carry a balance. Where people can afford to pay things down, they do."

Please keep in mind, one of my thesis are that many of the 7M households not paying their mortgages can easily eliminate all their credit card debt with the newfound 'wealth' they are creating via their 'self stimulus'.  Hence I would assume this is a portion of the reduction in average balances.  Frankly if you have a $1300 mortgage and a $5000 balance, you could get rid of all credit card debt in under half a year - no sweat.

We saw a huge change in behavior during this recession - in the old days people paid the mortgage above all else to keep in their homes.  Now, since so few put a dime into their homes, they have instead treated the credit card as most important as it helps with their cash flow.  The house was in essence a call option for many Americans - if it went up, they cashed in; if it dropped oh well - you walk away.  This is the unintended consequence of a nation where for years you need not put almost anything down, and many states are non recourse if you default

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