Issuers seeing the first signs of growth in consumer credit card borrowing in nearly three years might be hoping the long drought is over, but it is too soon to celebrate, analysts say.
U.S. consumer revolving credit, which began a broad decline during the recession, saw its biggest jump in May since mid-2008, according to Federal Reserve data.
It is a welcome sign, but overall revolving card debt as a whole has shriveled alarmingly, and the recent increase was likely incremental and on its own does not yet signal a turnaround, a Moody’s Investors Service’s Moody’s Analytics expert says (
Credit card borrowing eventually will resurge, but whether the industry will regain its pre-recession pace, given a variety of broad economic and social shifts, is unknown, observers say.
“We’re seeing a perfect storm across society that is conspiring to keep a large chunk of society away from leaning on credit cards,” Ron Shevlin, an Aite Group senior analyst, tells PaymentsSource.
Credit card outstandings rose steadily for four decades, peaking in 2008 just after the recession began to take hold, Federal Reserve data show. Late that year, a sharp decline began that is likely to reverse direction for the next couple of years, even as the economy grows, observers say.
Total outstanding card debt declined 18.9% in April, to $790 billion from $974 billion in August 2008, Fed data show. The last time the agency reported credit card debt at these levels was in 2004 (see chart).
Preliminary data suggest revolving credit in May rose to $793.1 billion, up 0.42% or 5.1% on an annualized basis from $789.8 billion in April, the Fed reported.
To be sure, credit card marketing efforts are ramping up again after a hiatus, and issuers gradually are relaxing strict underwriting standards put in place to staunch record amounts of red ink and account defaults.
But key factors driving credit card use may have changed, some observers say.
Indeed, ongoing anxiety about the economy has forced many consumers to hunker down and resist going into further debt, and although issuers are warming again to lending, most are reluctant to extend credit to many consumers whose finances remain shaky.
During the recession, many consumers, particularly those younger than 35, shifted to using debit cards when spending or to limiting purchases to the amount of cash they carried to manage everyday funds and avoid revolving credit balances, which generated the largest share of issuers’ profits through revenue earned through interest payments.
Consumers are spending less monthly on credit cards than they were before the recession, and their outstanding card balances are lower, data from Auriemma Consulting Group show.
In a study Auriemma conducted involving 1,026 consumers in March, participating credit cardholders said they spent an average of $515.57 per month using their credit cards, down 10.5% from an average of $576.22 found in a similar study conducted in March 2006.
Among cardholders who carried a balance, respondents in March this year said their average monthly outstanding credit card debt on the card they used most frequently was $1,952.08, down 24.5% from $2,584.20 during the same month in 2006.
“For a broad swathe of consumers, the recession is not over,” Patricia Sahm, Auriemma managing director, tells PaymentsSource. “During the recession, we saw a major shift in the way people used credit cards that caused them to pull back on credit card spending, protecting their credit lines for emergencies, while turning to debit cards for everyday purchases. Those habits have not shifted back to the way it was before the recession.”
Psychological factors that may have contributed to consumer pull-back on credit card borrowing include “a more financially conservative mood set in with all the negative economic news of the recession and the real-estate downturn, which eliminated the investments a lot of people thought they had,” Dennis Moroney, TowerGroup research director, tells PaymentsSource.
And when issuers closed millions of troubled borrowers’ accounts in response to widespread account delinquencies and trimmed cardholders’ credit lines to protect against further losses during the crisis, it further dampened consumers’ interest in borrowing, Moroney suggests.
Issuers may have gone too far. During all previous major U.S. economic recessions over the past four decades, Fed data show, total outstanding credit card debt rose, according to Dan Geller, chief research officer with Money Anxiety Index. The San Francisco-based firm measures financial anxiety based on economic data and consumer behavior.
Credit card outstandings rose 36.1% during the 1970 recession, to $4.9 billion in November 1970 from $3.6 billion in December 1969, and during the recession in the early 1980s it rose 22.2% to $65.6 billion in November 1982 from $53.7 billion in January 1980, according to Geller’s calculations. During the recession that began in 2001, outstanding credit card debt rose 1.8%, to $713.8 billion in November 2001 from $700.9 billion in March 2001, he says.
Unlike other recessions tied to specific events, this recession is broad-based and has wiped out jobs in diverse sectors, Scott Strumello, an Auriemma associate says.
“Previous recessions hit industries like steel or auto manufacturing or oil, and they often affected certain regions particularly,” he says. “This recession is broad-based, and it has decimated the value of people’s homes, which they thought was their core asset.”
Although the recession has officially ended, a consumer recession has taken hold that is not letting up, Geller says. “People feel very uncertain about the economy,” he says. “And as long as that continues, they are going to hold back on spending and borrowing, including on credit cards.”
As a result, “a lot of the credit card revolvers have gone away, leaving a large group of people who use credit cards but pay off their balances every month,” Moroney says.
Not surprisingly, card issuers are tallying far fewer losses these days. The charge-off rate on outstanding card receivables declined to 6.95% in May, down 413 basis points from its peak at 11.08% in February 2010, according to Moody’s Investors Service. Moody’s analysts predict the charge-off rate could fall to an all-time low of 4% next year (
And now certain card issuers appear to be incrementally increasing consumer credit lines and slightly loosening underwriting standards they tightened during the recession to protect against losses (
Equifax Inc. on July 1 said consumer credit card account growth increased 35% during the 12 months ended in March. Equifax did not release the total number of new consumer credit card accounts issuers opened.
But consumers are unlikely to react immediately to wider availability of credit because of a variety of regulatory and demographic factors, experts say.
The Credit Card Accountability, Responsibility and Disclosure Act, which went into effect in 2010, bars issuers from marketing credit cards to consumers younger than 21 without parental consent. The law also requires issuers to explain to cardholders in each statement how long it would take them to pay off their balance making only minimum payments.
The CARD Act also requires all credit card issuers to include a toll-free telephone number directing customers that need help to a nonprofit credit-counseling agency.
As these advisories were going into effect, Visa Inc. and MasterCard Worldwide, along with individual card issuers, stepped up their financial-literacy efforts (
“There’s no question that it’s increasingly difficult to market credit cards to younger consumers, partly because of new laws requiring more documentation. And many of these consumers have adopted debit payment as a habit,” Becker says.
A smaller pool of prospective new credit card borrowers also may be playing a role in the declining pool of card receivables, Shevlin contends.
“Adults born in Generation Y (generally between 1979 and 1994) were hitting their late 20s in 2008, which is right about the time many people start using credit cards to help finance household purchases and to start families,” Shevlin says. “That group was hit hard by negative economic trends which would have deterred them from using credit cards.”
The recession also likely sent Gen Y adults “a lot of messages about fiscal responsibility and discipline regarding credit cards that hit home,” Shevlin says.
Restarting credit card borrowing in such an economic and cautious environment will be tough, but not impossible, he says.
“Credit card borrowing is cyclical, and attention spans are shorter than we realize,” Shevlin says. Credit card borrowing eventually may rebound, but “issuers will need to tread water for a couple of years and wait for the natural demand of credit to increase.”
Issuers can only hope for modest growth when demand for credit borrowing resumes, Moroney says.
“The economy is still very sluggish, and as long as negative headlines about jobs, real-estate values and investing persist, most people are not going to be in the mood to take on a lot of unsecured credit card debt,” he says.
In the future, card issuers that have relied heavily on the interest earned from credit card debt may have to rework their business models, Celent analyst Zilvinas Bareisis tells PaymentsSource.
“Issuers used to making most of their money on balances increasingly are going to have to rely on interchange for revenue, and they are also going to have to fine-tune their customer-acquisition models,” Bareisis says. “There will always be a space for credit card lending and a group of people who need it, but demand for it may never return to what it used to be.”
The economic downturn plus new regulations put a damper on consumer credit card borrowing, and greater reliance on debit cards and growing consumer awareness of the risks of taking on debt also has hurt demand. Issuers may see card borrowing grow again when the economy improves, but any increase will be modest, and business models must reflect lower expectations in the short term.
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