What is Changing? Age, Economic Crises, And Shifting Patterns of Card Use

Perhaps the most important long-term problem that the U.S. payments industry confronts is the possibility of a permanent shift away from credit card use. The last fifteen years have been characterized by routine use of credit cards as the dominant transaction vehicle, coupled with pervasive use of revolving credit to generate substantial interest revenues for the issuers sophisticated enough to remain competitive in that sector of the market. But the rapid growth of the debit card since the mid-1990s, accelerating in the last few years, has drawn the long-term stability of the credit card payment model into question. Will the debit card soon replace the credit card as the transaction vehicle of choice for American consumers? Or will the credit card instead return to prominence when the economy returns to normality in a few years?

On closer examination, the future of the credit card is an intriguing question. The problem is that the current decline of credit card spending rests on a combination of several effects, with distinct implications for the future of the product. It is useful to understand how those effects have worked together to alter usage patterns in recent years.

The most challenging issue relates to age. It is easy to see that routine credit card users are older than routine debit card users. For example, the figure below shows data from the Federal Reserve’s 2007 Survey of Consumer Finance about how debit and credit card use change over the life course. As the figure displays, debit card use steadily declines with age, while credit card use rises through the life course to a peak at middle age and does not decline until cardholders reach 75 years of age.

One possibility is that the effect is generational: the high credit card users are the post-war Baby Boom generation, whose experience with the Great Depression was sufficiently remote to make a casual use of credit tolerable. A younger generation, observing the repeated economic crashes that resulted from the freewheeling behavior of their elders, might find routine credit more jarring. This perspective resonates with the reluctance of our parents and grandparents to carry revolving balances on credit cards: when you talk to people who remember the Great Depression, they have a deep aversion to debt, which they attribute to the scarring memories of the challenges of the 1930s.

An institutional parallel looks to the payments vehicles available at the maturity of different generations. When my generation first left home and took responsibility for separate household finances, the credit card was readily available but the debit card was not yet in any realistic way a practical choice. So another possibility is that the choice of a payment vehicle generally is made in youth and stays unchanged through the course of life; in that view, the earlier generation made the foolhardy choice of the credit card because it had no other available choice (except the check!).

Yet another possibility commonly suggested is that the effect is not generational, but age-related: perhaps debit cards are preferred by the young, while credit cards are preferred by the old. The 2007 data shown above cannot disprove this idea, because they show only a snapshot. It is difficult to reconcile, however, with the palpable aversion to credit cards shown by the Depression-era households. To me, it makes much more sense to view the current generation as consciously rejecting the credit choices of their parents. They could use credit cards and not revolve, as their grandparents did, but in fact they seem to choose the safer precommitment strategy of avoiding credit cards entirely.

A second problem that confronts credit card issuers is the psychological effect of the current financial crisis. The discussion above suggests that the effects of the Great Depression left an entire generation reluctant to take the risks of easy credit, and that the rise of credit has coincided with the maturity of the first American generation that never experienced such a jarring event. If this story is true, how will the current crisis affect credit card usage? Will it cause a marked shift away from credit card usage as families seek “never again” to risk the exposure to calamity they faced in 2009? It is probably too soon to tell what the ultimate effect of this shift will be, but it is reasonable to expect a substantial shift toward products that emphasize consumer planning. The Blueprint products from JPMorgan Chase are exemplary.

So what can data show us about these trends? For now, not as much as we would like. To understand the shifts well, we would need a longitudinal dataset that tracks particular households over time, to trace shifting patterns of payments use. Although nothing like that currently exists, the importance of payment cards to economic growth is motivating some important data-collection projects at places like the Boston Federal Reserve Board. For now, however, the most useful publicly available data comes from the Nilson Report.

The figure below uses Nilson Report data to show how credit card usage has been shifting over the last several years. The top line shows the ratio of credit card spending to overall payment card spending. Nothing about that line is surprising. It shows a steady decline in the share of spending on credit cards, accelerating since 2007, from 76% as recently as 2004 to only 59% during the first half of 2009. This is consistent with the received wisdom that credit card use is declining and also consistent with any of the explanations discussed above.

The second line shows the ratio of outstanding card balances to annual credit card spending – a simple metric useful for gauging the use of revolving credit on credit cards. This metric also was declining in the early part of the decade, but since 2006 it has been rising steadily, from 41% in 2006 to 47% during the first half of this year. Two explanations are apparent. One possibility is that those that are using credit cards have changed their behavior and begun to revolve more debt, not less. The more likely possibility, I think, is that the share of revolvers among credit card users is increasing as convenience users steadily abandon credit cards for debit cards. Under this explanation, those who use credit cards today are using them in much the same way as they did several years ago. It’s just that the population is shifting over time to include a greater share of revolvers and a smaller share of convenience users.

The final line completes the story, showing the ratio of credit card balances to annual spending on all cards. This line, like the first one, shows a marked decline, losing about a quarter of its volume in the last five years (from 37% to 28%). This suggests that a shift of convenience users from credit cards to debit cards (which easily could explain the first two lines) is not the entire story. Here, I think, the most likely explanation is the generational one: a slow influx of new users, predominantly debit card users, is lowering the share of revolvers within the card industry as a whole, even as that share increases within the credit card sector standing alone.