Up, Up and Away – New Data on Increased Spending

July 19, 2011

Ask the Industry: What are your predictions for consumer habits as far as credit card payments and spending? Join the Discussion

 

A couple of new reports released last week regarding consumer credit spending and payments seem to invoke the old “glass half full or half empty” scenario. Let’s start with the good news…

Increased Credit Spending and Payments Boosting Profits for Card Companies and Banks

A growing number of U.S. consumers are paying their credit card bill on time, according to the Associated Press, which reported Friday that five of the top six card issuers said the rates at which their customers defaulted on their accounts decreased in June.  

“Bank of America Corp. reported the biggest drop in defaults, with JPMorgan Chase & Co. and Discover Financial Services also showing significant improvement,” reported the news outlet.

Late payments also declined for most of the top FIs, with the exception of Capital One Financial Corp., for whom payments late by 30 days or more rose slightly.

This news is particularly encouraging for the sector, considering Federal Reserve reports charge-offs grew to 10.9 percent last year.

“For the first three months of this year, that rate was down to 6.96 percent — a significant improvement, but still well below the industry average of 3.82 percent before the recession, which indicates banks will benefit further as default and delinquency rates further improve,” the AP states.

Not only have consumers’ credit payments increased but banks’ profits for Q2 as well. AP states Citigroup retrieved $757 million that was designated for dealing with unmade credit card payments. As a result, Citigroup boosted its Q2 profits to $3.3 billion. Also freeing from reserves was Capital One, releasing $579 million that contributed to the FI’s 50 percent profit growth. AP adds that the $401 million Discover Financial Services brought out from its reserves last month helped to more than triple the company’s second-quarter profits.

“JPMorgan Chase’s customers spent 10 percent more using their cards. Discover said sales volume on its namesake cards rose 9 percent,” continued the AP in its report. “What’s less clear is if the higher spending will continue… And even when the recovery gains steam, few economists say they expect consumers to pile on debt again after spending the last two years paying it down.”

Click here to read more of AP’s report. And now for the bad news…

Consumers’ Personal Debt Ballooning

As the government explores options for reducing the national debt, NPR reports that consumers have been piling up personal debt of their own again post-recession.

The news radio outlet cites a recent survey by consumer credit monitor FICO, which found “officials at lending institutions expect half of all credit card balances will keep rising over the next six months.”

“The FICO surveyors found that credit card debt is rising for two reasons,” continued NPR. “First, wealthier people are feeling more confident so they are spending more freely, which adds to their credit card balances. And second, poorer people are feeling more squeezed so they can’t afford to pay off their balances in full. So for a lot of households, credit card balances are rising because the families can only afford minimum payments each month, which is allowing interest costs to pile up.”

Salary raises have been scarce during 2011, and more than 14 million people are still seeking employment, according to NPR.

Before the recent economic turmoil, New York Federal Reserve Bank reports that U.S. households in 2008 had $12.5 trillion in total debt, up from $5 trillion in 2000. But with the onset of the financial crisis and rise in unemployment, many reduced credit spending, with the total number of accounts dropping by 47 million from the beginning of the year. Overall between the fall of 2008 and the end of 2010, the Federal Reserve found the number of open credit card accounts decreased by about one-fourth, and balances fell by around 16 percent.

Yet consumer debt has grown each month in 2011, according to the Fed, with total consumer debt rising by 2.5 percent in May alone.

“That’s the kind of personal debt that includes car loans and credit cards, not home mortgages,” comments NPR.

Click here to listen to NPR’s full report.