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Card data: Signs of bad times

By Janna Herron · Bankrate.com
Wednesday, October 12, 2011
Posted: 2 pm ET

Recent credit card stats seem like good news at first blush.

Credit card debt declined in August for the second straight month, per the Federal Reserve. Late payments on credit cards fell in the second quarter, according to the American Bankers Association. And more rewards credit card holders are redeeming their rewards, according to a Capital One quarterly survey.

First, the optimistic, brush-the-surface view: Americans are curbing their plastic addiction, paying their bills on time and reaping rewards.

Now for the darker perspective...

Let's start with the first stat. Revolving debt, which includes credit cards, fell $2.2 billion in August. The decline mirrors a slump in consumer spending over the past two months.

But here's the real grim part: When consumers do spend their hard-earned money, it's not on discretionary items such as clothes, eating out or jewelry -- purchases that help boost a consumption-driven economy.

Americans are using what little money they have to pay for things they need, such as food and gas, says Chris Christopher, a senior principal U.S. economist at IHS Global Insight.

(Christopher also reminded me incomes have fallen, poverty rates are rising and household net worth is in jeopardy.)

So it's not a big jump in reason to think some of that necessity spending is going on credit cards. Bank of America said a third of all its credit card transactions are for gas and groceries. In some cases, people may be putting gas and groceries on their cards in order to reap more rewards -- after all, some card issuers hand out more points for these items.

However, in some cases people are charging these items out of necessity. And it would make sense people are paying their credit card bills at the expense of others so they can buy more necessities next month.

The ABA survey backs this up, too. It found consumer delinquencies rose in nine of 11 loan categories last month with the two exceptions being credit cards and mobile home loans.

Last, Capital One said Monday that its cardholders are cashing in their rewards points at higher rates. A quick inquiry to Discover and American Express delivered the same trend.

Ten percent more Discover cardholders have redeemed rewards versus last year, and the total dollars redeemed jumped 21 percent, says Jeanne Brodeur, director of rewards marketing at Discover Financial Services.

But Capital One's survey released Monday showed that 3 in 5 cardholders used the redeemed cash to pay down credit card balances or stashed it in savings. That doesn't sound like discretionary spending to me or any sign of better times ahead.

Even Capital One cited the sputtering economy as a reason why consumers are turning to rewards to plump their wallets. (To be fair, American Express attributed more rewards options for the uptick in redemption rates, and Chase says it sees higher demand for rewards near the holidays.)

"I'm not at all surprised," says Dennis Moroney, a research director at TowerGroup. "With a 9.1 percent unemployment rate, consumers are maximizing the value of what they have. And that's rewards points."

Are you using credit cards to make ends meet? And are you cashing in rewards to help your overall finances?

Follow me on Twitter: @JannaHerron

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