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Credit-card debt curtailing spending

SATURDAY, FEB. 9, 2008

America’s love affair with credit cards may be headed for the rocks.

Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.

The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.

Such a pullback may already be taking shape. On Thursday, the Federal Reserve reported an abrupt slowdown in consumers’ credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7 percent. That was off sharply from seasonally adjusted growth rates of 13.7 percent in November and 11.1 percent in October. And it reflects the volatility in consumers’ spending habits as economic growth sputters.

Sinking home prices have made it much harder to convert home equity into cash for living expenses. At the same time, plastic has pushed into every corner of American life, making new inroads that worry some economists and card issuers.

In past economic downturns, Americans used credit cards mainly for discretionary purchases, such as furniture, appliances and jewelry. Now, however, many of them regularly whip out plastic to pay for groceries, gasoline and other everyday necessities. Credit-card issuers won’t disclose exact figures, but they say it is evident that a growing percentage of card volume is for basic purchases. Many issuers even dole out extra rewards for such transactions.

Evidence is mounting that the plastic-fueled spending spree won’t last. In December, an average of 7.6 percent of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4 percent a year earlier, according to research firm RiskMetrics Group. The analysis includes a broad swath of more than $200 billion of credit-card loans that are sold off to investors by major card issuers like Citigroup Inc., Capital One Financial Corp., American Express Co. and J.P. Morgan Chase & Co.

Card delinquencies are ticking up from historically low levels, but the trend is sending shudders through lenders already reeling from the subprime-mortgage tumult. As a result, leery card issuers are bulking up their reserves against future card-related losses – and getting so much tougher on borrowers that some consumers are reining in overall spending.

After J.P. Morgan doubled the interest rate on her credit card to around 30 percent and lowered her credit limit in December, Jennifer Campion, a 39-year-old computer-software instructor in Chandler, Ariz., decided to eat out less often and to forgo her daily coffee at Starbucks so she can pay off her outstanding card balances. “Our whole lifestyle has changed at this point because of this strict budget we’re on,” said Campion, who has about $7,000 in credit-card debt.

On Thursday, card issuer Discover Financial Services said 49 percent of consumers it surveyed in January plan to reduce their discretionary spending this month. That was an increase of five percentage points from its December survey and a 10-point jump since September.

Consumers typically increase their borrowing in the early stages of an economic downturn as they try to maintain their living standards amid a weakening job market and slowing wage growth. That trend seems to be holding true to form so far.

For consumers who are in financial distress, paying for basic needs with plastic “is the easiest way out of that box,” said Bryan Derman, a partner at Glenbrook Partners LLC, a Menlo Park, Calif., consulting firm that specializes in the payments industry.


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