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Credit card use and debt both decline

by Indexcreditcards Indexcreditcards
Credit card use and debt both decline

Wednesday, Javelin Strategy and Research published research that makes grim reading for executives of credit card companies. Total credit card use is declining as more and more consumers are turning to their debit cards for purchases.

The trend is sharp. Bloomberg says, for example, that credit card payment volume through Visa® dipped by 7.3 percent during 2009 while that for debit cards rose by 7.9 percent. However, the Javelin survey suggests that the change in consumer behavior may be even more extreme. It asserts that, in 2007, 87 percent of consumers questioned said that they had used a credit card in the previous month, compared to 56 percent in 2009. The report’s authors say that, if the trend continues, credit card use could dip below the 50 percent mark during 2010.

Credit card companies’ triple whammy

This sort of drop in usage has a very real impact on card issuers’ revenues. Banks rely on “interchange fees” or “swipe fees” for a significant part of their card incomes. These fees are the cut of every transaction that merchants have to pay to banks for the privilege of swiping one of their cards. And the fewer swipes, the fewer cuts credit card companies receive.

But that’s only one of the companies’ problems. As recent credit card regulation has cut their ability to raise revenue through penalty fees, they rely more on income from interest payments. Oh dear. Earlier this week, the Federal Reserve released its monthly analysis of consumer credit. And it shows that revolving credit (which mostly comprises credit card debt) fell–according to Associated Press–during July for the 23rd consecutive month. That month, it stood at $827.8 billion, down from a high of $957.5 billion in 2008.

No wonder credit card rates have rocketed while interest rates in general are at or near all-time lows.

Credit cards without annual fees

The Javelin Strategy and Research document noted one more statistic that is particularly interesting. It says:

Fee sensitivity is paramount in the selection of a new card issuer, as 80% of consumers cited “no annual fee” as the most important criterion when choosing a new credit card.

This is understandable, especially among those who always pay their monthly balances in full and on time. If you never pay annual fees, or interest, or penalty fees then your credit card use is essentially free.

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