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Credit cards making big comeback

by Peter Andrew

After several years of declining use, credit cards are poised for resurgence. Despite the nation's very rocky economic recovery, consumers appear to have halted their belt-tightening and bank incentives to use credit cards rather than debit are gaining appeal.

- Beth Robertson, Director of Payments Research, Javelin Strategy & Research, Nov. 28, 2011

Credit card use set to explode

The press release from which that quote was taken includes some other interesting predictions. Javelin Strategy & Research forecasts that credit card use for online purchases is going to grow by 63 percent over the five years from 2011 to 2016. The same figure over the same period for debit cards is just 2 percent. "Alternative" online payment methods, such as prepaid cards and gift cards are expected to rise, but even by 2016 they're set to account for only 19 percent of all online purchases. By that time, Javelin expects, debit cards will account for 21 percent.

It's not just online that credit cards are coming back into their own. On Dec. 5, First Data Advisors recalled that it had first noted a change in credit card trends back in February, and since August had seen year-over-year growth in credit card spending outstripping that for both signature and PIN debit card transactions. During Thanksgiving Thursday and Black Friday this year, the value of all credit card transactions was more than 10 percent higher than over the same two days in 2010.

Rewards credit cards and credit card offers

So why the turnaround? It would be nice to think that it was because consumers had read "7 ways in which credit cards beat debit cards," an article that appeared on IndexCreditCards.com just about a year ago. But the real reasons are probably different. Since the Durbin Amendment reduced the cut that banks receive of each debit card transaction (but left that for credit cards at the same level) there's been a strong reason for financial institutions to push consumers towards credit card use. And that's most obviously revealed itself in two ways:

  1. On Dec. 5, CNNMoney quoted data from Mintel Compermedia that suggested that 1.3 billion credit card offers were mailed to consumers during the third quarter of 2011. That's an 85-percent increase over the level at the start of 2010.
  2. Rewards credit cards are now a lot more generous, by and large, than they were a year or two ago. Credit card companies see these as key ways both to build market share and to drive up their customers' use of their products.

Credit card debt not yet a problem

Javelin's study tossed up one troubling statistic. People using debit cards for single online purchases on average spend $58.29 on each transaction. However, those using credit cards in the same circumstances spend $82.10. Now, there could be a number of explanations for this, but one may be that consumers are tempted to spend more when buying on credit.

So how scared should we be by the prospect of Americans getting carried away with their card spending, and loosening their belts too much? Well, not too scared, at least according to research published Dec. 7 by TransUnion, one of the big-three credit bureaus. In a press release, Steve Chaouki, group vice president in the company's financial services business unit, remarked:

Credit card delinquencies are expected to remain fairly steady in 2012 ranging between 0.69 percent and 0.76 percent -- levels far below those typically observed in the last 15 years. In today's uncertain economy, consumers have found that credit cards are among their most valued assets due to the flexibility they provide. As a result, consumers have made a concerted effort to make on-time payments and maintain relatively low balances. In fact, credit card debt per borrower in the third quarter of 2011 stood at $4,762, approximately $1,000 less than the second quarter of 2009, the quarter in which the recession ended.

So maybe we can relax a little. But the specter of credit card debt still haunts many of us, so if you choose to use your plastic, you may want to do so with prudence.

Published 12/09/11 (Modified 04/20/12)


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