Chasing rewards: Credit card use accelerates as debit slows

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Credit card use has been on the rise for several years, and new data from the Federal Reserve Board shows that the trend is accelerating.

Last year, consumers used credit cards for 37.3 billion transactions, up 10.2% from 2015, according to Fed data released Thursday. That compares with 8.1% annual growth between 2012 and 2015.

In contrast, growth in the use of debit cards slowed last year. The number of debit card transactions increased 6% last year from the year before, to 73.8 billion, compared with 7.2% growth between 2012 and 2015.

The dollar volume of credit card purchases is growing at a faster clip as well. Total spending on credit cards increased 6.3% last year from the year before, to $3.27 trillion, while the volume of debit card payments rose slightly less at 5.3%, to $2.7 trillion.

The accelerated growth in credit card use comes at a time when late payment rates in the industry are rising. In the third quarter of 2017, 2.53% of credit card loans by banks were at least 30 days past due, according to Fed data. That was up from a low of 2.12% in the second quarter of 2015, but still far below the levels hit during the Great Recession.

Brian Riley, director of credit advisory services with Mercator Advisory Group, warned that credit losses in card portfolios may continue to rise.

“A really logical eye has to be on the collection side,” he said. “If there’s a shift in the economy, if for example, interest rates keep going up, it will start reflecting on household budgets.”

To be sure, much of the growth in credit card use is among consumers who pay off their bill in full each month. In the first quarter of 2017, 28.5% of U.S. credit-card holders did not roll over balances, according to the American Bankers Association. That figure was just 19.5% in the third quarter of 2008.

Many consumers are being lured to credit cards by the growing attractiveness of reward offers. With some cards offering as much as 2% cash back on all purchases, shoppers have a strong incentive to pay with their credit cards.

Banks can afford to make these enticing offers because they typically collect higher swipe fees on credit cards than they do on debit cards. Debit card rewards are rare and, when they are offered, less generous.

Riley expects to see U.S. credit card transactions hit another peak next year, even though many banks may tighten their card lending standards, and even as evidence suggests that debt-wary millennials prefer to use debit cards.

He noted that consumers tend to have more credit cards per household than they do debit cards, citing Federal Reserve Bank of New York data showing that households averaged four credit cards compared with 1.5 debit cards.

In the report released Thursday, the Fed found that total U.S. card payments increased 7.4% to 111.1 billion between 2015 and 2016.

Chip-and-PIN use rose dramatically. The Fed found that 19.1% of all in-person card transactions were made with a chip-enabled card, compared with just 2% in 2015. That is likely the result of issuers replacing old credit cards with new chip-enabled cards, as well as retailers upgrading their point-of-sale systems to accommodate the newer technology.

The Fed also found that remote credit card payments — those involving either online shopping or online bill pay — rose 16.6% from 2015 to 2016. Meanwhile, in-person payments increased by just 7.9%, reflecting the ongoing shift toward online shopping.

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