The Slow Death of Credit Cards

Great news: Americans are giving up on one of the most ruthless destroyers of wealth the numerically challenged have ever known: Credit cards.

Even though unemployment is still brutal and mortgage delinquencies are high, credit card delinquencies are at the lowest rate in at least two decades, according to data from the Federal Reserve:

Consider that the unemployment rate in 2000 was 4%, versus 7.7% today, and these numbers are astounding. No job? Pay cut? Doesn't matter. We're more current on our credit card bills than we've been in decades.

How is that possible? In part, it's because the most egregious lending made to borrowers who never stood a chance of repayment has been defaulted on and written off.

But there's more to it than that.

If you look at this data from Card Hub, you'll see that total credit card debt outstanding fell by about $200 billion from 2008 to 2012. During that time, banks wrote off $208 billion of bad credit card debt. So, the net increase in credit card debt between 2008 and 2012 was perhaps $8 billion, or virtually flat when compared to the $800 billion of debt outstanding. Inflation during that period totaled about 10%, and the U.S. population increased by 10 million. Debt in real, per-capita terms, therefore, is declining in excess of defaults. People are really, truly shunning credit cards.

In fact, real credit card debt per capita is now at the lowest level since 1996, and down by a quarter since the peak in 2007:

Source: Federal Reserve, Census Bureau.

Outside of defaults, there are two drivers of the decline. First, existing real balances are declining. Citigroup (NYSE: C  ) CFO John Gerspach mentioned in a conference call last year that "card revenues remain under pressure with declining average loan balances driven by continued consumer deleveraging."

Another is that the number of cards in circulation is flatlining, or even declining slightly. Take Visa (NYSE: V  ) . While its debit card business is booming, the number of credit cards it had outstanding fell from 2009 to 2011, and as of the end of 2012, it was about flat from three years earlier:

Source: Visa.

I won't burden you with another chart, but the pattern is similar for MasterCard (NYSE: MA  ) . We're just much more interested in debit cards than credit cards these days.

Which is great, frankly. Consumers are left with stronger finances. The three big credit card issuers -- Citigroup, Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) -- are left with stronger balance sheets. And the old style of American consumerism, one built on debt, may be coming to an end. Total household debt as a share of GDP has been declining for five years.

Is this a new trend? An enduring one that won't revert back to the old, unsustainable ways? Let's hope so. Good riddance, credit cards. 

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Read/Post Comments (18) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 03, 2013, at 3:51 PM, BuyCake wrote:

    Mortgage rates have been at or near historic lows for a few years now. Surely another factor in the declining credit card debt balance has to be people refinancing homes and rolling credit card debt into the mortgage.

    Also, the recession has forced many people to cut back on their consumerism. I expect credit card debt to rise again soon as Americans get back to living today and paying for it tomorrow.

    I agree that it would be a great thing for credit cards to go away, but I don't see them going away any time soon.

  • Report this Comment On April 03, 2013, at 4:56 PM, DukeTG wrote:

    I love credit cards. I pay mine off every month, have no annual fee, and Chase buys me an occasional Starbucks (thanks to reward points).

    Seriously tho, the one thing credit cards have over debit is fraud protection. I never use my debit card online just because of the increased liability I'd incur if it was stolen.

  • Report this Comment On April 03, 2013, at 5:18 PM, douglee8 wrote:

    I use credit cards for the rebates: Target, 5% at Target; Fidelity Visa and Fidelity American Express, 2%; Chase Amazon Visa, 3% at Amazon; Costco Executive ($100 annual fee) American Express, 3% for gas and restaurants, 2% for Costco; American Express Business, 5% for office supplies, 3% for gas. I don't carry a balance.

  • Report this Comment On April 03, 2013, at 5:33 PM, MAACPRIME wrote:

    You kind of need a credit card if you want to build a credit history.

  • Report this Comment On April 03, 2013, at 7:02 PM, ashwindollar wrote:

    If you have the discipline to buy only what you can pay off at the end of the month, it makes no sense to use a debit card instead of a credit card. In exchange you get fraud protection, cash back, and can hold on to your cash for an additional 30 or more days depending on where you are in your billing cycle.

  • Report this Comment On April 03, 2013, at 10:57 PM, herky46q wrote:

    Credit cards are not bad. Not being to pay it off at the end of the month is the problem. How many times do we have to go over this?

  • Report this Comment On April 04, 2013, at 5:52 PM, neelvk wrote:

    Many of the savvier borrowers are borrowing from P2P lending sites such as LendingClub. Credit Card companies need to be worried.

  • Report this Comment On April 04, 2013, at 5:59 PM, MattMattMatt wrote:

    Credit card DEBT might be down, but that doesn't mean credit card usage is down. I see nothing in this article to back up the claim that credit cards are being shunned. Credit card debt is being shunned, yes... But that's not the same as credit cards being shunned.

  • Report this Comment On April 04, 2013, at 8:39 PM, coloradofarmer wrote:

    It is going to be interesting when merchants and vendors start charging a fee for the use of credit cards (recent court case found the card companies can not prohibit it).

    To pay our local county property tax (in Colorado) when 'on line', you can either agree to an electronic 'check' to be withdrawn from your bank account or pay a 2.45% "convenience fee" for the use of either a credit or debit card. I send them a check.

    As a vendor at craft fairs, we are finding that a lot of people no longer carry bank checks OR more than a few dollars of Cash and rely entirely on credit cards. I've seen people put a $1 bottle of water on a card.

    Larger festivals now set up ATM's on site so that people can get cash for vendor booths that don't take cards.

    Vendors who don't take cards often lose sales but vendors who do take cards are hit with paying 3%-4% to the card companies

    We have had customers refuse to use an ATM because THEY have to pay the percentage.

  • Report this Comment On April 04, 2013, at 11:18 PM, Chuck2010 wrote:

    Not sure why any vendor needs to pay more than 2.75 in fees these days. Square offers that with no additonal fees. There are better deals available. As for me, I strongly dislike debit cards because there is no consumer protection compared to credit cards. Living within one's means and paying the credit card bill monthly is the key. It does start with having enough income to cover necessities and too many people are not making it on the low wage environment we are blessed with.

  • Report this Comment On April 05, 2013, at 12:47 AM, coloradofarmer wrote:

    We used Intuit "Go-payment" this summer and were shocked to find out (after the fact) that the fine print jumped the rate.

    Trying to read the settlement sheet was.... confusing. It looks like "rewards" cards cost us a higher fee and a special fee is added for debit cards, AmExpress is higher, and if your transactions generate less than $20 in fees per month they ding you again. (It's called a "gateway" fee.) Take a single card in a new month and it will cost you almost $20 for that one transaction. Go figure the % on a $10 sale.

    Ending average ends up higher than the 'advertised rate'. Always "gotcha" somewhere.

    We are going to try both Square and Paypal card reader next summer.

    I hate taking cards but it has become an evil necessity.

  • Report this Comment On April 05, 2013, at 7:57 AM, dbtheonly wrote:

    COfarmer,

    You might wish to investigate the programs Wells Fargo, Bank of America, or PNC offer.

  • Report this Comment On April 05, 2013, at 9:38 AM, Darwood11 wrote:

    My first credit card was an American Express back in 1971. I had to pay off the entire balance each month. I paid an annual fee for the privilege, but no interest or late fees. (I suppose saying that is somewhat like saying "Back in my day, we walked a mile to school in the snow.")

    Today, I continue to pay off the balance each month of any and all credit cards.

    As for CCs charging transaction fees, when that happens, I'll cancel that card, or find another one to replace it. If that fails, I'll figure something out.

    Credit cards in my household are strictly convenience and budgeting aids. How is that? One card for groceries, one card for gas, one for dining out, etc. I check the monthly bill and simply enter the total amount in Quicken.

    I won't be using Square. I don't trust the overall security of the systems, the cellphone networks and the databases. Sometimes early adapters find themselves on the "bleeding edge" of technology.

    I don't use a debit card.

    As an alternate to a debit card I've got an equity line of credit and a special credit card that will debit that. It's an emergency fund. Got it in Spring 2007 because the meltdown was coming and I told the spouse "This is the last time in a long time that we're going to be able to get a no hassle, no points, no fee equity line, so let's do it." We went to our bank and signed the papers that week.

  • Report this Comment On April 05, 2013, at 11:14 PM, ershler wrote:

    Darwood11,

    They are talking about stores charging transaction fees, not the CC companies.

  • Report this Comment On April 06, 2013, at 9:52 AM, cellofool100 wrote:

    I use my CC for everything (car insurance, garbage, mortgage, gas, hair cuts, meals, water bill - u name it) and get reward travel thru MCard. I pay off the bill each month. That last part is common sense.

  • Report this Comment On April 06, 2013, at 5:06 PM, ershler wrote:

    coloradofarmer,

    Some places have been charging for the use of cards by offering a cash discount, even if you are paying with check or money order. This is almost universal on sites like GunBroker. Some gas stations also offer this.

  • Report this Comment On April 06, 2013, at 5:33 PM, clawki wrote:

    I think that the real reason is the fact that the labor force continues to shrink. This combined with the fact that the poorer credit risks have been rinsed out of the system for the time being since they have no job, no unemployment benefits, and no other reason for banks to feel that they will pay it back. Lets also be fair, banks are a but more strict now than they were (granted some of that is by government mandate, but either way it is what it is).

    The irony is that once things get started back up (assuming China doesn't start to look at US Debt as junk bond status) Congress will start to climb all over itself talking about how credit restriction are prejudicial and unfairly strict. Then they will pass some law that will back "poor disadvantaged credit risks" (similar to what they did with housing (and we all know how THAT turned out)

  • Report this Comment On April 10, 2013, at 2:16 PM, Tomohawk52 wrote:

    People like the typical one who visits this site are a lot savvier than most with money. So it doesn't surprise me that there are a host of people here who actually turn a small profit from using their CC.

    I am pleasantly surprised by the article but tend to think that BuyCake (first response) might have hit the nail a bit closer to the head.

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