Learning from the latest economic crisis, regulators have been trying to swap the credit card swiping trend with alternative payment methods and prompting consumers to reduce their credit card debts. Consequently, a declining trend of credit card usage has been witnessed in recent years.
But does this imply that the Americans’ love for plastic credit is slowly dying out? A closer look into the underlying data might reveal that the US still moves on credit cards and that these remain a major economic force.
According to a report released last Friday by credit reporting agency Experian, the average credit card debt decreased 4% to about $4,200 in 2010 from $4,467 in the prior year. However, for several cities, the average credit card debt is much higher than the national level.
Cities More in Love
The agency has identified 25 metros where the average credit card debt is very high; even than the national level. Most of these cities are located in the South.
Looks like San Antonio, Texas shares the most intimate relation with credit cards. The city topped Experian’s list with an average card-account balance of $5,177, up a striking 21% from the national average. Residents of Jacksonville, Florida with a balance of $5,115 came a close second.
Other areas still loyal to credit cards include Hampton Roads (Virginia), which ranked sixth with an average balance of $4,925. Bearing the ninth rank and a very high average balance of $4,771 was the Richmond metro area, also in the state of Virginia.
So, there is no denying that residents of a significant number of US cities are still heavily reliant on their credit cards.
National Stabilizers
While cardholders of the enlisted 25 metro areas are running up hefty balances on average, consumers of some cities managed to pull their debts below the national average. This has primarily counterbalanced the country’s heavy credit card debt.
Among others, Fort Wayne, Ind. witnessed a 24% decrease in debt, the maximum recorded in 2010. Also, El Paso, Texas and Boise, Idaho showed lesser affection for plastic credit, both registering a 14% reduction in balances.
Direction of Consumer Trends
Since 1968, credit card debt saw persistent annual increases through 2008. It declined for the first time in 2009 and hung on to the same trend in 2010. Consumer debt outstanding had declined to about $800 billion in October 2010 from about $974 billion in August 2008.
Consumers have also taken to alternative payment methods. Debit cards and prepaid cards have become popular substitutes, significantly reducing in usage of credit cards.
Declining Credit Score
Credit score is a number based on a statistical analysis of a person’s credit files, which represents the creditworthiness of that person.
In 2010, Americans carried an average of 1.97 cards, down 23% from 2007. As a result, they put more debt on the cards they retained. Cardholders utilized more than 30% of their total available balance, up 10% from 2007.
Carrying fewer cards with more debt will negatively impact their credit scores. This may hurt their ability to get other types of credits like car or mortgage loans.
CARD Act Worked in Favor
Aspects of the CARD (Credit Card Accountability, Responsibility and Disclosure) Act, which was signed into law by President Obama in 2009, is protecting credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees. This is a solid impetus for cardholders to keep using their cards.
Though the Act was aimed at protecting the average consumer, it is threatening the profitability of major card issuers. These include Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Capital One Financial Corp. (COF) and Discover Financial Services (DFS), since issuing credit at a rate suited to a customer’s risk is now a complex process.
Credit Cards Economically Viable
Following the enactment of the CARD Act, card issuers are reducing the amount of credit they provide to borrowers. Though this will force card holders to tighten their purse strings, the lack of spending will restrict the pace of economic recovery.
Despite several drawbacks, credit cards play a vital role for consumers as they provide liquidity and reassurance for daily transactions. Though a hefty credit card debt could hurt the economy, the hard fact is that ours is a consumption society, and cannot possibly live without them. In a capitalist nation like the US, lower credit card transactions will only end up in resisting economic growth.
Taking a quick look at credit cards inside the wallet, it’s pretty obvious that whether we love them or hate them, Americans can’t do without them.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
Zacks Investment Research
