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VERSACE: Consumers cutting back on credit
Question of the Day
As I look around and watch consumers shop, I have noticed that generally they are doing so less. When they do shop, they have been using their credit cards less and using their cash and debit cards more. If anything, this goes against the trend line of people paying more and more by credit as we have seen over the last several years.
Perhaps that is the point - people are cutting back not only on when they spend but how they spend.
According to the Nilson Report of this past April, Americans’ credit card debt reached $972.73 billion at the end of 2008, up 1.12 percent from 2007. The same report estimated the average credit card debt per household was $8,329 at the end of 2008. Getting a little more refined with the data, Nilson estimated the average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008. In my view, this latter figure is the better one to consider.
To frame this, the average household income in 2007 was $50,233; as I write this, the estimated figure for 2008 is not slated to be released until the end of this month. Another relevant measure when discussing household income and credit cards would be discretionary income, with the question being - are people living within their means or are they living large via credit cards? I think we can agree the recent bubble economy saw consumers living in excess to one degree or another.
With the economic recession and rising unemployment, the most recent official statistics furnished by the Bureau of Economic Analysis show disposable income fell for three of the last five months ending in June. So we are all on the same page, we are defining disposable income here as after-tax income available either to save or spend. Digging a little deeper, we have to make an adjustment to one of those months as the American Recovery and Reinvestment Act of 2009 had a much bigger impact in May in boosting personal current transfer receipts. Excluding that, disposable income fell for four of the last five months. At the same time, the savings rate has climbed and real consumption has been more or less stagnant, which suggests people are not spending.
More recent data suggest consumers are continuing to get their financial houses in order.
Per Moody’s, credit card charge-off rates dropped in July, marking the first such move since September. Credit card charge-offs measure balances that banks have given up on collecting. The charge-off rate on U.S. cards for July was 10.52 percent, down from a record high of 10.76 percent in June. At the same time, the credit card delinquency rate dropped to 5.73 percent in July, from 5.81 percent in June, marking not only the lowest level in 2009, but also the fourth consecutive month-to-month drop. As background, the delinquency rate measures the proportion of accounts that are more than 30 days past due.
To be fair, historical data shows that second-quarter payments are more likely to be made than in other quarters largely due to the use of tax refunds or salary bonuses to pay off debt, often after running up card balances during the holidays. Even after adjusting for this, charge-offs and delinquency rates are still high, and with the unemployment rate expected to climb further in the coming months, we could see a reversal in recent trends. Moody’s did not change its projection that charge-off rates would peak in mid-2010 at 12 to 13 percent, when the unemployment rate is expected to reach 10 to 10.5 percent.
Another explanation for the drop in those credit card metrics is that over the last year, credit card companies have pursued delinquent customers, cleaned up their accounts by purging bad clients and taken losses. Odds are their respective customer portfolios reflect a more favorable mix of less-risky customers who are able to spend money.
One looming wild card is the 2009 Credit Card Act. Under the new law, banks must now provide written notice to customers 45 days before increasing their interest rate or changing the terms on a card and give customers option to close accounts and pay down balances at the old rates. Banks also have to give customers 21 days to pay their bills after sending out statements.
The aim of the Credit Card Act is to give consumers more information regarding their credit and reduce surprises about things like interest-rate increases. As such, it would be rather prudent to examine the latest rash of updates and all that paperwork that accompanies your monthly statement to see exactly what you’re being charged for and what potential new penalties may exist.
As is the right of the consumer, should you not be happy with your revised terms, you can take your business elsewhere or in this case try to take it elsewhere. If your existing bank or credit card company turns you down for a new card that may offer more favorable terms, there are other avenues to explore, including Web sites like CreditCards.com. This site and others allow consumers to search, compare and apply for various credit card types. One word of caution - be selective in your number of credit card applications: repeated credit applications could actually impair your credit score.
Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at firstname.lastname@example.org. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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