A recent analysis run by the third largest credit bureau in the United States, TransUnion, reveals that consumers have been hard at work paying down their credit card debt. From the first quarter of 2009 to the first quarter of 2010, cardholders have been busy putting some $72 billion more towards their outstanding debt than charging new purchases.
Giving Credit Where Credit is Due
“Many people in the financial services industry believe charge-offs have been the leading factor in declining credit card debt since the start of the recession,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.“In fact, some have stated that charge-offs account for the entire change in card balances over the past two to three years. In reality, the dynamic is more complex. Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times.”
As of the first quarter of 2011, the data showed average individual borrower debt to be at the lowest point it’s been in a decade, $4,679. Between the first quarter of 2009 and the first quarter of 2010, the average cardholder’s debt dropped from $5,776 to $5,165.
Lenders Gain Insight
The TransUnion study will prove to be an invaluable tool for card issuers in determining how todistribute their product.
Said Becker, “It is also important to note that the drivers of deleveraging on an incident basis are different at various points along that credit risk spectrum.Charge-off is a more predominant driver of deleveraging among subprime consumers. Among prime consumers, paydown is the major factor. Although it sounds simple, this is critical insight for lenders: it allows them to better understand the preferences of various sub-segments of consumers and respond appropriately to each.”
Paying to Play
Significantly, the study revealed a growing trend amongst younger cardholders towards using their debit cards to make purchases rather than their credit cards. Such information means that they are focusing on spending money they have as opposed to digging themselves into debt swipe by swipe.
“All things being equal, we believe that consumers, especially younger adults, will continue to have an increasing preference to use their debit cards over credit cards,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit.“However, the credit/debit card landscape is still in transition. Regulatory and legislative proposals either currently under discussion or recently enacted will impact the industry significantly and could alter this payment preference trend. Thus, consumer credit use and behavior should be closely monitored in the coming years.”