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:

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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:

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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:

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

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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.

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