2010: The Death of Credit Cards?
With the Great Recession still in effect and consumers still cutting back, 2010 could be the year of death for credit card profit margins. A battered consumer, a fear of debt and new legislation regarding credit card interest rates could create a death spiral for plastic.
I’ll discuss this issue line-by-line.
Credit Card Legislation
The biggest game changer of them all, new rules for credit card companies go in effect Februrary 2010. These rules are very consumer friendly, requiring payments over the minimum balance to attack the highest interest rate first, then trickle down to the lowest. Currently, payments over the minimum balance go to the lowest interest rate debt (often balance transfers in the single digits) while normal purchase debts (often in the high teens) are allowed to compound. Credit card companies are already starting to shift their business models. I used to get 2-3 balance transfer mailings a week, now I get 1-2 a quarter. Credit card companies don’t want you to use low interest lines, especially if its not going to allow them to compound their higher interest portions.
Fear of Debt
One beautiful aspect of recessions is that people cut back and start saving again. This provides capital for lending, for saving, and for loans for business expansion, which is incredibly healthy for the economy long term. While saving, consumers are also cutting out the debt. Credit card debt numbers released by the Federal Reserve indicate that revolving debt (nearly entirely credit card debt) decreased at an annual rate of 9.3% in October 2009. Total debt dipped from $976.1 billion to $888.1 billion due to low interest rates and a new emphasis on savings. Polls around the country conducted during the holiday shopping season showed that consumers were most interested in paying down debt than they were buying Christmas presents. One poll of 8500 consumers asked what consumers would do if they were given $500 free and clear today. 91% would save it or pay down debt. Only 14% would spend it Christmas shopping. I doubt the results would be the same as recently as 3 years ago, before the recession.
What’s Left for Credit Cards
The trend is most obvious. Credit card profits will dip due to legislation, consumers are less willing to use credit cards, and very few have access to as much credit as they did in 2007-2008 when the economy was “booming.” If I were a gambling man, I’d be short credit card companies throughout 2010, regardless of how the economy performs.
