Credit card habits show signs of change as consumers pay off debt, save more
Sunday, May 30, 2010
One of the big questions of the Great Recession is whether American consumers have truly learned their lesson.
For years, consumers spending beyond their means pushed the nation's economy into hyperdrive. Americans racked up record levels of debt, sending the savings rate into negative territory. And when the financial crisis hit, many found their personal balance sheets in shambles.
Recently, glimmers of a new, more fiscally responsible consumer have emerged. The number of late payments on credit cards dropped to a six-month low in March, according to Fitch Ratings. The personal savings rate has recovered to 3.6 percent, after falling for two months. American Express says more customers are making more than the minimum payment and paying off debt faster. The nation's outstanding credit card debt has fallen by about $100 billion over the past year.
"We are seeing loan balances shrink . . . and this is consistent with the industry trend," American Express Chief Financial Officer Daniel Henry told investors.
Yet some analysts say the picture is not so rosy. Card issuers have booted millions of the worst offenders off their books, which also reduces the amount of outstanding credit. During the first quarter, the rate of charge-offs hit another record high. Instead of consumers cleaning up, they argue, card issuers are simply clearing out the trouble spots. In addition, the stubbornly high unemployment rate and small gains in incomes will probably make it difficult for consumers to keep digging themselves out of debt.
"If we've learned anything from the credit nightmare," said John Ulzheimer, president of consumer education for Credit.com, "it's that we were partially responsible for it ourselves."
It's clear that at least some consumers have taken the lessons of the crisis to heart.
The plunge in home prices and the stock markets over the past two years -- an estimated $15 trillion in lost wealth -- shocked many people into slashing their spending. Not only did they save more, they also paid down debt and were reluctant to take on new loans. According to government data, the amount of disposable income that consumers must use to pay off their debt has dropped to less than 6 percent for the first time in more than a decade, an indication that American's debt load is dwindling.
The cholesterol analogy
The spike in late credit card payments has also abated. The percentage of consumers more than 60 days delinquent in their payments dipped in March to 4.27 percent, while those who were 30 days behind fell to 5.74 percent, according to Fitch. Although those results are still high compared with historical averages, they reflect attempts to improve personal balance sheets.
There is also a silver lining to stock market declines and low interest rates that have eaten into household wealth: It makes investing less appealing. Instead, many consumers have found that their dollars are better spent paying off debt, said James Chessen, chief economist for the American Bankers Association, a trade group.
"I think people are consciously understanding that relationship and taking advantage of it," he said.
Ulzheimer compared America's debt to a health problem: Often, we don't realize it exists until we get sick.