Why is credit card use increasing?
Every month, First Data releases the latest results of its SpendTrend analysis. This tracking study measures the total dollar value spent across the country in countless stores and through numerous online shopping sites, and breaks that down by payment method.
Its February 2013 findings, published March 12, suggested that, on average, consumers may be growing more cautious in their overall spending. True, compared to Feb. 2012, the total expenditure measured increased by 4.6 percent. But the previous month had shown a 6.2 percent rise on January 2012. Some of this slow down in spending growth might have resulted from unusually poor weather, but other factors, First Data speculates, might include higher payroll taxes and gasoline prices, and delayed tax refunds from the IRS.
Credit card use up
The stand-out data in this SpendTrend analysis concerned the ways in which people are choosing to pay for their purchases. Here's the breakdown of dollar-volume, same-store growth for different payment media in February:
- Credit cards: up 7.9 percent
- Signature debit cards: up 2.0 percent
- PIN debit cards: up 1.3 percent
- Checks: down 4.2 percent
- Closed-loop (usually store-branded) prepaid cards: up 3.2 percent
Wow. Credit cards were up very nearly 8 percent, dwarfing the rises and falls seen by other forms of payment. First Data's new evidence reinforces earlier figures from the Federal Reserve Bank of New York that showed that credit card debt rose by $5 billion in the last quarter of 2012. Something's happening here.
Why credit cards are making a comeback
So why are people increasingly reaching for their credit cards again? Well, even the experts aren't entirely sure. In a press release, First Data vice president and economist Rikard Bandebo explored some possibilities:
The fact that the personal savings rate significantly declined in January and consumers shifted more spending onto credit cards could be a sign that consumers may be overstretched. However, there are many other factors that could impact spending going forward including an improving labor market, steadily rising home values, healthy gains in the equity markets and the federal budget sequestration.
Yes, consumers could be swiping their credit cards more because they feel richer and more secure, and therefore less stressed and guilty when they flash their plastic. And they could well be right to do so:
- On March 8, the U.S. Department of Labor announced that unemployment is continuing to fall: by 236,000 in February, bringing the rate down to 7.7 percent, from 7.9 percent in January.
- That trend looks set to continue. On March 12, the quarterly Manpower Employment Outlook Survey reported the results of a poll of more than 18,000 U.S. employers. In every state and metro area, respondents on average reported positive hiring plans -- to an extent that ManpowerGroup characterized the shift as "a significant increase in job prospects." Meanwhile, the number of employers anticipating staff cuts was at its lowest since 2000.
- Also on March 12, Comerica Bank published its U.S. Economic Update for that month, and observed that, in February: "Not only were more workers hired, but they also worked longer hours and got paid more…"
- That Comerica Bank update's GDP forecast showed annualized growth at 2.0 percent or more in each quarter of 2013, rising to 2.7 percent in the final three months of this year.
- And, on March 4, Fiserv Case-Schiller said it expects the housing market soon to return to normal, with a sustained growth in prices.
- Meanwhile, the Dow Jones Industrial Average reached a record high on March 5 -- and then went on to set new records on at least three more consecutive days.
Just don't go mad
After years as Jeremiahs -- predicting doom and gloom, and preaching restraint to consumers -- we on this site are genuinely overjoyed to list such a compelling and comprehensive range of positive economic factors. And, on balance, we're pretty optimistic that the future really is going to be much rosier than things have been of late.
However, we can't resist continuing to urge some caution. The impact of tax rises and government spending cuts that may result from the -- at the time of writing -- still current sequester are yet to be felt. And, even if that's been resolved by the time you read this, we're due another fiscal crisis in May, when the debt ceiling expires. Worse, there's little doubt there'll be another, similar budgetary issue along a few months later. Few expect these to undermine completely the still-sluggish recovery, but they sure could take some of the shine off it.
Credit card rates likely to rise
More worrying for us is the potential for a sharp rise in credit card rates, especially now so many such products have variable rates. These are, at least in part, tied to wider interest rates, which are generally expected to increase, possibly sharply, once the recovery gains traction, and the Fed stops pumping money into the economy.
When, in February, Andy Kessler talked about this in The Wall Street Journal (registration/subscription may be required), he said that "everyone on Wall Street knows interest rates will go up," and called the prospect a sword of Damocles.
Thanks to the Credit CARD Act of 2009, any hike in credit card rates shouldn't -- unless you're at least two months behind with your payments -- affect existing balances on your cards. But they are likely to make any future borrowing more -- maybe much more -- expensive. And if, once that happens, you suddenly need to use your cards to get you out of an unexpected mess, you may be very happy if your then-existing balances are low.
Indeed, none of this good economic news detracts one bit from Barbara Marquand's excellent recent advice on this site, 3 reasons to keep credit card balances low.
Published 03/25/13 (Modified 11/20/13)