The fact American cardholders owed $361 billion at year's end does not mean consumers are paying interest charges on $361 billion. American consumers charged $600 billion, or an average of $50 billion per month, during 1995. Convenience users, those paying-off balances each month, generated 53% of the card volume or $318 billion last year. Additionally, the Christmas shopping season card volume artificially inflates December's charge volume by 1.6 times or about $80 billion. So actual interest-accruing bank card debt is about $281 billion, considerably lower than the $361 billion actually owed at year's end. Consumers are increasing debt but not nearly as fast as the current statistics would suggest.
Since 1990 consumers have increased their annual charge volume on bank credit cards 128% while receivables (at each year's end) have grown 107%. By contrast, actual card debt has grown only 78% since 1990. The ratio of receivables-to-volume has declined steadily since 1990 from 66% to 60% while the debt-to-receivables ratio also declined from 90% to 78% between 1990 and 1995. Interestingly, on a debt-to-card basis, card debt is only up 29% since 1990.
Furthermore the statistics fall even further from the stratosphere if you discount annual inflation.
It's an industry generated phenomenon called "over-reaching".
The bank card industry has saturated the country with plastic. Every American who wants a bank credit card has one, or two, or more. At year-end 1995 there were nearly 400 million bank credit cards-in-force in the U.S.. That's about 1.6 cards for every living man, woman and child in the U.S. From the card issuing side the bank card industry is obviously mature. To grow in today's marketplace card issuers must steal or purchase cardholders from competitors or explore/exploit niche markets.
To buy your competitor's customers is not cheap. You'll have to pay up to a 20% premium for each cardholder balance. To steal your competitor's cardholders you'll have to dangle some real bait like a super-low teaser rate, balance transfer incentive or some kind of a rewards program. Acquisition costs for new accounts, through marketing, ranges from $35 to $125 per account. Little wonder why some issuers have headed overseas for new card markets.
The other growth strategy is to turn over rocks, locating "under-developed" credit consumers. Under-developed credit consumers includes low-income consumers, high debt consumers, elderly consumers and problem credit consumers. These were markets largely ignored by the card industry up until 1993. Today some hungry issuers are pre-approving low-income consumers with credit lines equal to 50% or more of the individual's gross annual income. Consumers with card debt loads exceeding 20% of gross annual income have seen credit lines jacked-up to $50,000 or more. Retired, middle-class, eighty year old consumers have been approved for $25,000 credit lines. Consumers, fresh from bankruptcy court, have been approved for generous unsecured credit lines with 29% interest rates. You don't need a Harvard MBA to understand this constitutes high-risk lending. The price for overly aggressive card issuers is high delinquency, eventually high write-offs and an overall decline in credit quality.
So the point is: most Americans love the convenience of plastic, continue to use credit cards responsibly, and in many respects use credit cards more wisely than ever before. It's some card issuers who have manufactured most of the delinquency concerns. "What Goes Around Comes Around" . . . only problem is consumers usually have to pick up the tab when it comes around.
While the card issuing side of the business is saturated, the card usage side is far from mature. Credit card volume accounts for only 20% of all consumer payments in the U.S.. There is a big pie representing trillions of dollars waiting to be displaced by plastic. Debit cards and stored-value cards are already beginning to capture this market. But the economics are different. Card issuers earn small transaction fees instead of big juicy interest income returns. Hopefully the surge of debit and stored-value cards will cannibalize high-risk credit card accounts.
Consequently, the credit bubble will not burst if card issuers respond appropriately to the current statistics and if consumers continue to perform responsibly.
