Cashing In Q&A columns

Is the American love affair with credit cards over?

It’s no surprise that many consumers are unhappy with credit card companies, particularly as many issuers have recently raised interest rates and lowered credit limits on customers. But some surveys and financial experts suggest that consumers’ disappointment could lead to long-term behavioral changes that may leave credit card issuers out in the cold.Is the American love affair with credit cards over?

“People want to avoid debt like the plague right now,” says Frank Jones, manager of marketing analysis for Southfield, Mich.-based  business advisory firm AlixPartners. So much so that in a 2009 survey designed to determine how the recession is changing consumers’ long-term lifestyle plans, AlixPartners found that 36 percent of respondents planned to stop using credit cards completely.

Such an extreme reaction is no surprise to Michael Mihalik, author of “Debt is Slavery: And Nine Other Things I Wish My Dad Had Taught Me About Money.” “I think one of the things people are getting out of the experience of this economic downturn is they are feeling like slaves to their debt,” says Mihalik, who details in his book how he climbed out of $10,000 in credit card debt. “Slavery is a very harsh term, but I’m sure people are feeling burdened and oppressed by the debt that they’ve accumulated.”

Several surveys bear that out. When AlixPartners asked respondents what their No. 1 financial concern was today, the top answer was eliminating personal debt. When asked what their No. 1 financial concern would likely be five years from now, eliminating debt remained a top answer, second only to recovering retirement savings. “What that told us was they want to eliminate debt now, but a lot of people are in deep enough that they think it’s going to take more than just this year,” says Jones. The survey also suggests that consumers’ distaste for debt is something that will stick around for the long haul rather than being merely a knee-jerk reaction to the economy, Jones adds.

What we’re going through right now is a real painful experience, but it’s making people evaluate what’s really important in their lives, what really has value and what doesn’t have value.

–Author Michael Mihalik

Another study, conducted by Worthington, Ohio-based market intelligence firm BIGresearch, yielded similar results, underscoring the depth to which consumers’ attitudes toward debt have changed, says Pamela J. Goodfellow, senior analyst for BIGresearch. When asked what changes they would make over the next five years, 43.4 percent of respondents said they would not incur a large credit card debt. The desire to avoid credit card debt was not only relegated to those with lower incomes. In fact, BIGResearch’s study found that those who made more than $75,000 were more likely than average to cut back on credit card usage and pay off balances each month.

Age affects perception
While the credit crisis has taken its toll on every demographic, some age groups are planning to make bigger adjustments than others. The youngest users of credit are particularly interested in avoiding mountains of debt. Of those who took the AlixPartners survey, “the younger ones showed a tremendous level of maturity in terms of learning the lessons from their parents’ mistakes” says Jones. Not only do they plan to save a greater percentage than other age groups, but they were more likely than other age groups to say that they would be more cautious with credit cards in the future.

A study conducted by debt counseling organization Money Management International found similar results. Since June of 2008, the number of Americans increasing their savings rose 50 percent. Members of Generation Y — those born between 1980 and 1996 — are leading the way.  Likewise, The Charles Schwab Corp. released a survey in March 2009 that found that 52 percent of young adults between the ages of 23 and 28 said the single most important issue for Americans to act on today was making better choices about money.  More than half of that same age group also said that financial education should be a bigger priority for grades K-12 than physical education and sex education combined.  “It’s as if they’re looking at their parents and saying, ‘No way,’ ” Jones says.

Long-term implications
It’s too soon to tell whether Americans will remember the pain of the credit crisis once an economic recovery is in full-swing and credit is free-flowing again. But some say the gravity of this particular downturn sets it apart from other instances when people expressed a desire to manage their money more effectively.

I think a lot of people would say the economy just had a heart attack. And maybe that will be enough to drive people to actually change their behaviors as opposed to saying they want to change.

— Frank Jones    
Manager marketing analysis, AlixPartners    

Jones compares it to a dieter trying to lose weight. “I’d like to lose 10 pounds, but I’m in good health and don’t really have to, so who knows when I’m going to get around to doing it. But if I just had a heart attack and the doctor said I had to lose weight, I think my success rate would be higher. I think a lot of people would say the economy just had a heart attack. And maybe that will be enough to drive people to actually change their behaviors as opposed to saying they want to change.”

But once consumers actually make that change, it gets easier, Mihalik says. “The most painful experiences can actually lead to the best growth. What we’re going through right now is a real painful experience, but it’s making people evaluate what’s really important in their lives, what really has value and what doesn’t have value.”

Once people get used to living within their means rather than reaching for a credit card to buy the latest iPod or a new outfit, they will realize that they’re not missing that much. Not only that, but the freedom from having to worry about interest rate hikes and minimum payments will be a far greater reward than new merchandise, Mihalik adds.

See related:Credit card users beware: Terms they are a-changing, poll: People cutting back card spending in face of changing economy

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