Consumers Continue to Cut Back
Posted on October 6th, 2010
Consumer borrowing fell for a record 23 consecutive months in July with the help of Americans who cut back on credit card use (17th drop in 18 months), as they work to pay down debt following the worst recession since the 1930s. Borrowing on credit cards fell by an annual 6.3% in July after a bigger 7.5% June decline. The only increase in credit card use this year was a small 1% rise in January. However, one small bright spot for the economy was the boost in the category that includes auto loans which rose 0.6%, after gains in July of 3.2% and May of 1.2%. The annual level for total consumer credit stands at $2.42 trillion, 6.3%
lower than the peak of $2.58 trillion set in July 2008.
While lowering overall debt is a positive move for American households, it places a drag on an economy that is struggling to rebound – 70% of total economic activity is consumer spending. “On the demand side, households continue to show signs of caution as they face high unemployment, minimal wage increases and poor housing conditions,” said Gregory Daco, senior U.S. economist at IHS Global Insight, “while on the supply side, tight lending remains the norm.” The last time borrowing with credit cards increased was in August 2008.
Debit card use is replacing credit cards for consumers looking to avoid incurring more debt. Debit card purchases accounted for 65% of all sales, up from 62.3%, the Nilson Report said. Market research firm Javelin Strategy & Research reports that total payment volume for debit cards surpassed credit cards for the first time in 2009 and a trend that is expected to continue in 2010. Visa concurs with debit card volumes increasing by 7.9% in 2009, while credit cards declined by 7.3%. The use of prepaid cards is projected to increase to 9.3% of total online retail purchase volume in 2014 from 5.8% in 2009, the Javelin report said.
Economists expect households will continue to cut back on borrowing as long as incomes and employment don’t show significant improvements. Many banks are responding to the trend by adding rewards programs and other features to their debit card.
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