Credit Repair News Highlight/December,2011

Credit card spending is up: good news for economy?
Credit card spending continues its steady climb, overtaking debit cards for the first time in three years. '''Does this mean consumers are out of the woods? Or just out of money?'''

More people are now using credit cards than debit cards, according to First Data, an Atlanta-based payment processing company that processes card transactions for 4.1 million stores and businesses. They often produce economic snapshots of the electronic payment industry.

The latest First Data snapshot confirms a trend that's been occurring throughout the year. During the first quarter of 2011, credit card purchases climbed 8.6 percent, and then in the second quarter, 9 percent. In the third and most recent quarter, credit card buying went up another 10.6 percent.

Three years ago, when the recession seemed particularly bleak, debit card usage was higher than credit cards, which at the time was a big deal.

The fourth quarter numbers aren't out yet, and obviously, one shouldn't speculate, but that's not going to stop me from trying. After all, on Black Friday, shoppers spent $52 billion, far more than had been predicted, according to Time.com, which cited numbers put out by the National Retail Federation. And a Discover survey noted that the number of Americans who believe they'll spend more than their holiday budget jumped from 10 percent last year to 14 percent this year.

Obviously, this is all very good news for the credit card industry, although questionable news for those 14 percent of shoppers, but all in all, excellent news for the economy. While economists generally agree that in the years leading up to the recession, Americans relied too much on credit, with credit cards and home equity loans and some mortgages that should have never been approved, economists have generally said that the economy would turn around a lot faster if shoppers were spending like they had been before the recession.

And now, it's starting to look like that's happening. So what accounts for more credit card usage?

A few things:

Plenty of perks and rewards. We live in a capitalist society, and so naturally, once the recession began, consumers spoke with their wallets and largely kept their credit cards safely tucked away. That in turn caused a lot of credit card companies to sweeten the pot to win consumers back. Numerous credit issuers, for instance, began eliminating the foreign transaction fee for travelers who use their credit cards. Many credit cards also come with much more generous cash back rewards that weren't available a few years ago. ''' Credit for everyone! (well, okay, that might be overstating it a bit…) During the depths of the recession, as you likely well remember, you could have found your credit line slashed by panicked banks--even if you were paying on time and had been a good customer for years. That has been changing, however, as a report earlier this year from the Federal Reserve showed, and it has slowly but surely become easier to get credit, and more of it, than it had been the last few years.

Debit cards are becoming less appealing. This last reason for credit card usage going up has less to do with the economy than banks simply wanting us to use credit cards more. Not all debit cards are shadows of their former selves, but financial institutions are increasingly going out of their way to make them less attractive to use, mostly by eliminating rewards programs associated with the cards.

For a while, major banks were planning to charge consumers for using their debit cards. Chase and Wells Fargo tested a plan in which they would make you pay $3 a month to use your debit card, and most infamously, earlier this year, Bank of America attempted to charge you $5 a month if you planned on using your debit cards with any regularity.

The backlash was so strong and publicity so negative, however, that B of A quickly reversed that decision with a heh-heh-nothing-to-see-here-folks response.

The reason banks aren't as excited about debit cards as they used to be is due to a new government regulation (specifically, the Durbin amendment of the Dodd-Frank Act). On October 1, the interchange fee--the money that banks make from retailers when you make payments with debit cards--was reduced from a high of 44 cents to no more than 21 cents. The smaller interchange fee is a welcome break for retailers, but it was a decision that smothered banks' profits.

Whether this surge of credit card usage fortells a strong and robust 2012, it's impossible to say, but it's a pleasant and hopeful thought to end 2011 with.

References:

 * | CardRatings.com