The decline of credit cards

By Felix Salmon
September 19, 2012

Remember when credit-card companies started cutting back on credit lines because delinquencies were going up and people weren’t paying off their debts? Well, pull out your hankies and prepare to dry your eyes: now they have the opposite problem. Harry Terris at American Banker has a classic headline today, “Card Payment Rates Stymie Lending”.

The problem for credit-card issuers, explains Terris, is that those of us with credit cards are doing a much better job of paying off our balances. Here’s the chart, showing the percentage of outstanding principal balance that cardholders are paying off every month:

paymentrate3.jpg

Well done, America! You’re paying off your credit-card debt at unprecedented rates! And the result is that the total amount of credit card debt in America is going nowhere. Here’s the chart:

fredgraph4.png

After falling sharply during the financial crisis, revolving debt has been flat since the beginning of 2011. And in real terms, of course, that means it’s falling. Here’s the same chart in billions of constant 1982 dollars:

fredgraph7.png

And here’s that same chart, zoomed in to the past 10 years.

fredgraph2.png

The lesson here, for credit-card issuers, is “be careful what you wish for”. They worried about credit-card balances being too high during the recession, and cut off a lot of credit just when people needed it most. And then balances just fell, and fell, and never recovered.

For consumers, this is excellent news. It almost never makes sense to borrow on a credit card: the rates are insanely high, most of the time. Using credit cards can be perfectly sensible: they’re very handy payment mechanisms. But running a balance on your credit card is the first no-no of personal finance, especially if you have any liquid savings at all.

So even as America worries about the rising level of student loan debt, here’s some good news: the level of credit-card debt is going nowhere, and is actually falling in real terms. Let’s keep that up. It will mean lower profits for the big banks, who issue the lion’s share of all credit cards, and it will mean lower interest payments for consumers.

Of course, people still need loans. So once we’ve weaned ourselves off credit cards as a source of credit, the next task is to find an easy and cheap way for individuals to borrow relatively short-term funds. Banks hate personal loans, because they’re not nearly as profitable as credit cards. And peer-to-peer lending isn’t going to work when it comes to supplying broadly-available credit lines. Still, I’m beginning to dare to hope that the credit-card scam — sell convenience, and then make billions of dollars from overinflated interest rates — is beginning to come to an end.

12 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

“Still, I’m beginning to dare to hope that the credit-card scam — sell convenience, and then make billions of dollars from overinflated interest rates — is beginning to come to an end.”

What, they’re not satisfied by the billions they make on the transaction fees? Credit cards are a scam, period.

Posted by Moopheus | Report as abusive

The reason why debt is lowering is because the lender is not lending. If for some reason you find yourself in debt and being sued – take a look at http://www.answer-summons.com – they provide 6 defenses that help.

Great article – at some point debt will start rising again – its in our nature.

Posted by Bartly | Report as abusive

Thoughts- as I work in card space and have a lot of data available.

1) It is unclear how egregiously high card interest rates really are. With 4000+ credit card issuers there is a lot of competition and downward pressure on rates and would compress any economic returns over time. This is different than suggesting people should borrow on their cards, only that the issuers (banks and credit unions) took a big beating frm 2008-2010, which could be used to make the case that they were actually charging too little to make a profit and consumers got too good a deal for the risks they actually represented.

2)Making money at a 13% interest rate (national avererage +/-, per Fed research)is no sure thing because these products are expensive to service with relatively small balances compared to other loans. Banks do not like personal loans because small balance lending is typically a money-losing proposition after expenses; card is much the same but with some additional revenues from interchange fees to make it a reasonably profitable product when times are average-to-good (but horribly unprofitable when times are bad).

3) The higher payment rate is not driving down overall industry balances. In fact, the graphs do not support each other: payments up, industry size flat after recessionary delcine. I suspect the high payment rates are (i) up in relation to relative lows in the middle of the recession but not so much over historical averages (graph only plots from mid-recession forward), and (ii) reflective of the fact that the largest issuers marketed almost exlcusively to high-transaction-volume-but-don’t-revolv e segments during the recession…necessarily growing a portfolio with higher usage and higher payment rates. But this does not imply (nor does the graph support) that this means the overall industry is in ‘paydown mode.’

4) The overall industry decline was due exlcusively to charge-off of defaulted balances during the recession. When those charge-offs are added back into the size of the industry there actually would have been no contraction: people kept borrowing on their cards if they could- only because about 30% charged off during the recession was there a contraction. Most of my clients, in fact, are seeing their card portfolios grow.

All that said, an average consumer can typically find the best card deal at a credit union or perhaps a community bank, not the largest banks.

Posted by TRKAdvisors | Report as abusive

” It is unclear how egregiously high card interest rates really are”

Be a day late on a payment, even if you are paying off the entire balance, and the rate goes to 29.99%. I’d call that egregious. The rates never used to be that high, and the cost of money for banks is lower than it was, say, ever. If banks can’t make money at 13%, that is mostly due to their incompetence. Banks may haver taken a beating in 2008 and 2009, but that was only due to their own bad management.

Posted by KenG_CA | Report as abusive

Be an HOUR late–and sometimes the deadline was Eastern Time, Central Time, or Mountain TIme, or whatever–and the rate goes up to 29.99%.

I’ve switched all my business to credit unions and couldn’t be happier

And in response to the crocodile tears shed by the big banks–kick them when they’re down…

Posted by bluepanther | Report as abusive

I think 2 major forces are at play:

1. I think the number of people who use credit cards as revolving credit and pay off in full has gone up significantly

2. This means that credit card companies are left with high-risk customers for whom they offer credit rates that are really high.

As the revenue pot dwindles, the credit card companies are left with huge overheads to manage. I think the industry will see a sea-change in the way they operate once mobile banking & peer-to-peer and SMB payments take off. The pie will shrink even further.

Posted by InfiniteThought | Report as abusive

I think 2 major forces are at play:

1. I think the number of people who use credit cards as revolving credit and pay off in full has gone up significantly

2. This means that credit card companies are left with high-risk customers for whom they offer credit rates that are really high.

As the revenue pot dwindles, the credit card companies are left with huge overheads to manage. I think the industry will see a sea-change in the way they operate once mobile banking & peer-to-peer and SMB payments take off. The pie will shrink even further.

Posted by InfiniteThought | Report as abusive

You know what this means: the CFPB will be stopped from reining in new, higher fees.

Posted by GRRR | Report as abusive

Quick response to a couple posts:
- Under CARD Act a consumer credit card account cannot have ‘penalty pricing’ (such as a 29.9% rate) imposed on existing balances unless the cardholder is 60 or more days late. The ‘one hour late’ scenario offered above has not been allowed since Feb 22, 2010.
- The pie is not shrinking; card balances overall are growing- even if slightly. Total Revolving Credit (mostly credit card) is up $5 billion from June 11 to June 12 (Fed Report G.19).
- Credit unions do indeed typically offer the best deal.

Posted by TRKAdvisors | Report as abusive

Well a smart person doesn’t have a credit card at all, or had one they use only in extremis. It is never smart to give yourself more incentives to live beyond your means. Live without a credit card for a few months and you will learn you can live without it for your whole life. Your consumptions habits will change (decline) and you will have less apparent material wealth. But your goods will make you just as happy, and in the long run you will have less stress and more money.

Posted by QCIC | Report as abusive

“Of course, people still need loans.”

What for? Mortgages, because they involve massive amounts of capital which must be either rented or borrowed. College, because the expense precedes the earnings. Perhaps an occasional automobile loan for when you are young and broke?

But what people REALLY need is to live within their means. Spend 95% of your take-home pay instead of 100% of your take-home pay, and the difference in lifestyle is negligible. That can be as simple as finding an apartment that is 10% cheaper, or living with a roommate, or driving an old car for one extra year.

Credit cards don’t allow you to spend more than you earn. They allow you to shift your spending from one year to another, but you end up spending LESS overall than you could have spent without credit. Much less, when paying double-digit interest rates. The same is true of payday loans.

I don’t at all see it as a moral issue, but to me it is a clear practical issue. Too many people have too little money to begin with. The LAST thing they should be doing is giving their precious disposable income to the banks, and the only way to avoid that is to avoid credit. Felix seems to believe we can create kinder, gentler banks. I see this as akin to kinder, gentler sharks. (E.g. Finding Nemo.) Swim in that tank and you will get bitten.

Posted by TFF17 | Report as abusive

Great topic. Well a smart person doesn’t have a credit card at all, or had one they use only in extremis.

Posted by AmberSayon | Report as abusive