Why Are Americans Moving Away from Credit Card Use? The Reason the “Loan Balance” isn’t Growing as Expected

ZUU Japan

Updated 20 June 2018 at 5:30 am

In the United States, it seems that the decline in credit card use is an issue that cannot be stopped. While consumer vigilance in regards to rising interest rates is a background factor, it is not the only reason for the decline. If fact, the actual reason for the decline is overlooked and surprisingly well hidden. This article will analyze the cause of the decline of credit card use in the US from various viewpoints and try to provide perspective on where things will go from here on out.

“Credit Card Use” In February Not Growing as Expecting

In February, the annual interest rate of the U.S. consumer credit balance, when compared to the previous month, grew by 3.3%. This marked a three month consecutive decrease in the rate of growth. The fact that the credit card loan balance has increased by a negligible 0.2% is particularly noteworthy. In January, the increase was sluggish at 1.7%, but it is even lower now. The loan balance showed a high annual growth rate of 10.3% in the October-December period of last year, but the rate or growth has been declining rapidly since the beginning of this year.

Although the loan balance can be considered to be a “barometer of personal consumption”, it seems that consumer spending in the United States has come to an abrupt halt. The personal consumption in February, when adjusted for inflation, has leveled off with a 0.2% decrease from January. With personal consumption accounting for “about 70%” of the GDP (Gross Domestic Product), a sluggish use of credit cards in the current state of affairs raises concerns for a rapid economic decline.

“Anxiety about the Future” Promotes the Refrain of Expenditures

On the other hand, the savings rate increased from 2.4% to 3.2% from December to January. In February it again rose to 3.4%. The reason for the increase in savings is that people have been considering “preparations for the future”. However, according to the New York Federal Reserve’s March Consumer Survey, surprisingly, consumer concerns in the US are found in the labor market.

If concrete figures are introduced, wage growth in the next year will be 2.6%, 0.1 point lower than the last month, of which, the low income bracket in particular experienced a large decrease. One year from now, the probability of the unemployment rate raising is 34.4%, 2.1 points higher than the previous month. Within a year, the probability of being unemployed will have risen from 12.8% to 13.9%. Furthermore, the probability of people voluntarily leaving their jobs will have declined from 21.4% to 19.3%, and the possibility of finding work when a job has been lost will also have declined from 59.7% to 57.6%.

From this, the declining confidence in consumer labor markets and “anxiety about the future” may explain the decrease in credit card use.

In fact, according to American employment statistics from March, the increase in the number of employed persons was 103,000, far below expectations, and the unemployment rate remained steady at 4.1%, contrary to expectations.

In March, the FOMC (Federal Open Market Committee) predicted the unemployment rate to be 3.8% in 2018 and 3.6% in 2019, with the labor market continuing to improve as expected. However, consumers seem to be pushing these predictions out of sight. Perhaps they are doubtful of an optimistic outlook. At the very least, from looking at the employment statistics from March, one can see that a sense of disappointment has risen in consumer minds.

The Effects of Increasing Interest Rates and the Popularity of “Mobile Payment Systems”

In addition, the rise in interest rates and the popularity of mobile payment systems seems to have lead to a decrease in credit card use.

According to CreditCard.com, the credit card interest rates during the week of April 4th reached a record high national average of 16.62%. Last week, the national average was 16.47% and was 16.15% six months ago.

The rise in interest rates can be attributed to the March interest rate hike of the FOMC. Rates are expected to rise more than two times within the year. This trend is also expected to continue in the following years and suggests that consumers are becoming aware of rising interest rates.

Incidentally, according to the settlement company TSYS, the inclination of consumers towards mobile payment systems is increasing more and more and 51% of credit card holders are interested in mobile payment systems at retail outlets. In 2016 this figure was only 40%.

The percentage of individuals who have made payments using a smart phone instead of a credit card increased from 7% in 2015 to 12% in 2017, especially among younger generations. For credit card holders aged 25 to 34 years old, 45% use person-to-person money transfer systems such as Paypal, Benmo, and Zell.

In this manner, the growing popularity of mobile payment systems and the rise in interest rates is creating a state in which people are refraining from using their credit cards.

Creeping Inflation Concerns

The worrisome possibility of “creeping inflation concerns” (market participants in Wall Street) “to further boost interest rate hikes” is also emerging.

The CPI (consumer price index) in March dropped by 0.1% from the previous month, the first time in 10 months since May of last year. However, the impact of declining gas prices has been significant and the core index, excluding food and energy, rose by 0.2%.It was 2.4% in the same month of the previous year and has increased from the February figure of 2.2%. Since September of last year, it has remained at a steady 2.0% or more for 7 consecutive months. The core index reached the 2.0% mark after rising from 1.8% to 2.1% in January of the same year.

The PPI (wholesale price index) in March rose by 0.3% from the previous month, up 3.0% from the same month of the previous year. This suggests that pressure on the cost of living to rise is increasing with the CPI having reached a steady figure of 2.0%.

Despite the FOMC’s March suggestion of two more rate hikes within the year, the “target value of 2% within the year” is a situation that can occur, and the possibility that rate hikes will continue is increasing.

Have International Tensions Spurred Cost Increases?

Furthermore, the escalation of the US – China trade war and the increasingly tense situation in the Middle East could apply pressure on inflation.

Retaliation tariffs have been announced by both the US and China, and if implemented, the rise in import and export prices will boost inflation rates globally.

Another matter for concern is the restoration of oil prices to the high values of 2014 due to the current tensions in the Middle East. Surrounding the central confrontation between Saudi Arabia and Iran, the hostility between the United States, Israel and Saudi Arabia with Russia, Iran and Syria is increasing. If the US places sanctions on Iran, the risk of an upward swing in the price of oil will become apparent.

Taking the above situation into account, there is a high possibility that the rise in interest rates will persist due to fears that credit card use in the US will continue to decline. (Susan Green, a journalist living in NY)

(By ZUU Japan)