Credit cardholders made at least $72 billion more in payments on their credit card accounts than they spent on purchases using their cards between the first quarter of 2009 and the first quarter of 2010, underscoring the dramatic effect the recession had on consumer behavior, a new study from TransUnion suggests.
The reversal in repaying debt from rampant spending was “as big a factor, if not bigger,” than widespread account defaults in causing an unprecedented reduction in consumer credit card receivables over the past two years, Ezra Becker, TransUnion vice president of research and consulting, tells PaymentsSource.
According to Becker, certain pundits and credit card marketing websites have erroneously put forth the notion that credit card charge-off rates, which peaked in 2010 and have since fallen to record lows, were the primary factor causing total credit card receivables to sink into a decline over the last two years (
In fact, the decline in account balances and total credit card receivables was the result of a variety of factors, including card issuers restricting cardholders’ credit limits even as they paid down their balances. Other factors included less spending and an overall consumer mood of caution regarding debt along with issuers charging off delinquent accounts and doing account closures to mitigate risk, Becker contends.
Another striking example of how consumer behavior changed during the recession occurred in 2004, when cardholders paid an estimated $2.1 billion more in credit card purchases than toward their card debts, according to TransUnion data.
“This reversal is even more profound when you consider that alternative forms of revolving credit, such as home equity lines of credit, were far more available in 2004 than in 2009,” Becker says. “But five years ago, consumers were not paying down their debts like they were during the recession, when the alternative funds had dried up.”
From their peak in 2006, home-equity loan originations have dropped 96%, according to TransUnion.
The effect of mass numbers of consumers paying off credit card balances and driving down overall card receivables was most pronounced among cardholders with higher credit scores, Becker says.
“Paying down balances had the greatest effect among prime and superprime cardholders, while charge-offs played a bigger role in reducing receivables from subprime customers,” he says.
The data show that “consumer behavior and preferences can have a profound and material impact” on the credit card market, Becker says. As a result, lenders should recognize which categories of consumers are shedding debt and why to shape effective marketing programs, he says.
“Lenders need to increase their ability to look across their product networks and evaluate where the opportunities lie instead of pushing cards on people that clearly are deleveraging debt and (be careful to avoid) missing pockets of demand within certain credit-score bands that actually want credit again,” he says.
Some former credit card borrowers may be sitting out now, but “credit demand is cyclical and issuers need to pay close attention to which consumers are deleveraging and find out why so they can provide appropriate products at the right time to audiences as they signal interest in credit,” Becker says.
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