Voluntary Or Not, It’s Still De-leveraging

by Ken Paterson 0

By Ken Paterson, Director,Mercator’s Credit Advisory Service

Marx (Groucho) famously quipped “Iwould not join any club that would have someone like me for amember.”It looks like US consumers are adopting the same philosophywith regard to credit cards; whether they are being offered newcards or being dropped by old ones, consumers are using creditcards less and opening fewer accounts.

The massive volume of creditcard charge-offs has obscured this trend.Indeed, Q2 2010 data fromthe Federal Reserve shows credit card charge-offs at top 100 bankshitting a new high of 10.9 percent (annualized).Charge-offs ofcourse reduce industry outstandings, and a large (but not total)part of the 14 percent decline in revolving credit outstandingssince 2008 is attributable to this fact.Some consumers arede-leveraged involuntarily.

But other consumers arede-leveraging voluntarily, by choice, or necessity.In Mercator’s2009 CustomerMonitor consumer survey, half of payment cardholderssaid they were trying to pay with debit or prepaid cards in orderto avoid borrowing, and nine out of 10 said they expected thechange to be permanent.Newly released TransUnion data show thataverage combined bank card debt per cardholder dropped 13 percentyear-over-year as of June 2010.Of perhaps greater concern, theirdata showthe number of new account openings have dropped nearly 6.5percent since 2009.And just to round out the picture, according topublicly released statistics from Visa and MasterCard, total creditcard accounts supported by their issuers have dropped 22 percentbetween Q4 2008 and Q1 2010.

Yes, some important part of thisongoing decline in accounts and card usage is driven by issuers’need to improve credit quality and more conservatively underwriteconsumer credit in the current economic environment.But someimportant part is also driven by consumer choice and newly cautiousbehavior patterns that will be reinforced as the economic doldrumscontinue.When issuers are in a position to open the credit faucetsonce again, will consumers respond?Or will they invoke Marx(Groucho)?