As Americans tighten belts, they adjust attitudes toward credit
Businesses wonder if consumers' newfound distaste for debt will last
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
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
"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."
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 angy.
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
"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.
I pretty much just pay everything with cash, which I think has
actually helped me be a little more disciplined. For me, that has
definitely changed a lot over the past 12 months
|-- Caleb Backholm
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
"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
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
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