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Debtors repent by walking away, not by paying off
‘New frugality’ a deception
“We know that over the past 18 months, banks cut credit limits for 58 million cardholders,” citing escalating delinquencies, said Bill Hardekopf, author of the Credit Card Guidebook.
“If issuers keep this up and cut 45 percent of the spending power on credit cards, they will be forcing consumers to continue to reduce their usage of credit cards and find alternative forms of payment like debit cards and cash.”
While stopping repayment may seem like a simple and easy way to get out of debt, the mounting defaults and bankruptcies have made it hard or impossible for borrowers to later obtain new loans. That forces them to spend out of cash or use debit cards that tap into only the cash they have in their bank accounts.
Consumers in default or bankruptcy do not kick the debt habit on their own. Surveys show many whose credit was cut would like to get more credit, but banks have been unwilling to accommodate them, Mr. Hardekopf said.
Whether by choice or under the gun, consumers thus are becoming more frugal, saving more and spending less.
“It appears that consumers have come to realize that — now is the time to balance saving versus spending” after years of going ever more deeply into debt, said Ezra Becker, director of strategy at TransUnion.
“It remains to be seen whether this dynamic will be short term or a new paradigm for consumer behavior.”
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