As Americans tighten belts, they adjust attitudes toward credit

Businesses wonder if consumers' newfound distaste for debt will last

By Jay MacDonald

If buying on credit today were a card game, it would be Texas Hold 'Em.

Consumers these days are keeping their credit cards close to their vests, leaving merchants to anxiously wait and wonder if they're bluffing when they vow to no longer spend beyond their means.

Data seem to indicate consumers are serious about changing their ways. This week, the Federal Reserve reported that credit card balances plunged by $10 billion in August. That annualized drop of 13.1 percent represents the 11th straight monthly decline in card balances amid rising unemployment, tightening credit and a dyspeptic economy.

The one-two punch to their retirement accounts and home values they suffered last fall has left many Americans frozen in place and seeking direction. Job fears further obscured the path forward. Whether they will be inclined to ante up for another hand of no-limit consumer spending anytime soon is anyone's guess.

Dusting off an old idea: saving
As a result, Americans are doing something they haven't done in decades: They're saving.

"They've just cut back. They are really changing," says Minnesota-based author and financial consultant Ruth Hayden. "They're not eating out, they're giving up the second car, they're shopping at consignment stores and getting their hair cut every two months instead of every month."

To further compound the mall malaise, credit card companies have taken Draconian measures to tighten terms, slash limits and jack up interest rates to existing customers, in part as a hedge against sweeping federal credit card reforms set to take effect in February.

That has angered credit card customers, including Caleb Backholm, owner of Backholm Insurance in Aberdeen, Wash., who ceased using his main business credit card when his card company increased his rate from 4.9 percent to 15 percent.

"I told them I didn't think it made much sense; I had never been late with a payment. I've had it for several years and now I wasn't going to use it anymore. I would never use a 15 percent card," he says. "But they said that's just what they were doing."

Though he has now switched to a different card, he admits the thrill is gone.

"I'm not charging nearly as much as I was, and I pay it off every month. I pretty much just pay everything with cash, which I think has actually helped me be a little more disciplined," he says. "For me, that has definitely changed a lot over the past 12 months."

Consumers' revenge: Goodbye, credit card
Backholm isn't alone. An October survey by Consumer Reports finds that more than one-third of the 1,211 credit cardholders surveyed had paid off and closed a credit card since January. Half of those did so because their card company hiked their rate, slashed their limit or imposed new fees.

"I have very angry clients," Hayden says. "Really good customers that have always paid their bills have gotten their interest rates jacked up, and they're angry. Good people with good credit are angry."

While they may be angry, tough times have forced some consumers, such as Steve Hochberg, head mechanic at Bolts Automotive in Clearwater, Fla., to actually rely more on plastic to get by.

"Oh yeah, big time. A lot of our cash now goes more to our big bills. We write checks for certain things, like our mortgage, but when we go out shopping, 90 percent of the time we're using our credit card now more than cash or check," he says.

"It's just easier. I would rather be able to go and buy something that I need for $200 to $300 with my credit card -- and it will only cost me $20 to $30 a month -- than have to lay out that money right upfront because, nowadays, we need it for other things. Even gas -- we used to pay cash for gas all the time because some places gave you a cash discount. Not anymore. Now we just use our credit card because you don't really have the liquid assets anymore. We figure the bills come once a month so it gives us like four weeks to actually save up to whatever we have to pay off."

Merchants eye fees, offer layaway
Merchants aren't too excited about the hand they've been dealt, either. Without customers, product sits on shelves, eventually forcing layoffs and sending profitability southward.

At iconic Square Books in Oxford, Miss., they've seen an increase in credit card purchases since the downturn, and that's been a mixed blessing.

"People are using more cards and less checks, and that's bad for us because we have to pay somebody else a percentage of that transaction," says general manager Lyn Roberts.

The constricting credit market has been an unexpected boon to retailers such as Sears, Kmart, TJMaxx and Burlington Coat Factory, some of the few remaining national brands to offer that time-pay relic from the 1980s: layaway.

Kmart Chief Marketing Officer Mark Snyder says the retailer experienced such a boost from 600,000 layaway customers during the 2008 Christmas holidays that it launched similar summer and back-to-school layaway promotions nationwide.

"Certainly, when the economy started to change a year ago, it became very obvious from the dialogue we were having with our customers that being able to have a payment option like layaway was really going to influence their decision about where to shop, particularly for the Christmas holidays," Snyder says. "This helps them better plan and better manage their families' needs and expenses."

Hayden disagrees with the Grinches at the National Retail Federation who predict a 1 percent decline in sales for the upcoming holiday season.

"I don't think this is going to be too bad of a Christmas holiday because the stores are being more thoughtful and strategic," she says. "They are really controlling inventory now. I think they are going to do pretty well. They are really being smart about where the consumer is right now."

Long, slow recovery
Hayden views these hard times with a seasonal "It's a Wonderful Life" optimism.

"I read somewhere that 63 percent of consumers say they're not going back to old habits. I don't know if it will be 60 percent, but I do think that 40 or 50 percent aren't going to forget about savings. I think they're going to change and keep some modified behavior for a long, long time."

"This is a good thing because you cannot build a solid economy on consumer debt. The recovery is just going to take longer because we're not going to do it on a big spurt of spending on credit. That's just not sustainable."

See related: A comprehensive guide to the Credit CARD Act 2009,  Fed: Credit card balances plunge by $10 billion in August, Retail trade group projects 1 percent decline in holiday sales in 2009, 10 questions to ask about layaway plans

Published: October 9, 2009

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