After bottoming out in 2011, credit card issuers are beginning to see their portfolios grow again, says global ratings agency Fitch Ratings. Credit card purchases rose 7.6% in 2010 and 9.7% in 2011 while lending portfolios shrunk 8.0% and 1.6% during that time, but American Express, Capital One, and Discover all posted modest portfolio growth at the end of 2011. Fitch says that this could be because card holders are increasingly more likely to be transactors than revolvers.
Consumers who repay their full balances every month are known as credit card transactors, while those who simply pay their minimum balances and maintain their credit card debt are called credit card revolvers. Revolving debt – the type that is offered by credit cards – is generally easy to get but can be difficult to for consumers to get out of if they spend beyond their means and fall behind on payments.
Revolving Around Rewards
Part of the reason for the shift away from revolving debt, according to Fitch, might be because consumers are making better use of credit card rewards programs. They also say that the Durbin amendment, which caused the extinction of rewards programs on debit cards and checking accounts, may be having the effect of encouraging more people to use their credit cards for everyday transactions, which they are easily able to pay off in full.
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In order to take the fullest advantage of credit card rewards programs, cardholders should not carry revolving debt that accrues interest. If they do, the rewards are almost always completely nullified by the interest that the cardholder pays on their revolving balance.
For example, let`s say you carry $3,000 of debt on a card that offers 3% cash back on all purchases (a higher-than-average reward amount, just for the sake of illustration) and carries a fixed APR of 14.99%. You make about $1,000 in purchases each month, which you pay off, but that $3,000 sits on the card accruing interest and you are unable to zero out the balance. Are you really earning anything from that cash back rewards program?
Vanishing Cash Back
The answer is no. Over the course of one year, the $360 you earn in cash back will be eaten up by over $1200 in interest charges. Not only that, if you continue that spending pattern, you’ll never get out of debt.
The smartest thing to do in that situation would be to transfer that $3,000 balance to a new card that offers a long 0% APR introductory period – some cards offer intro periods of up to 21 months. Ideally, you`d find a deal that offers no balance transfer fee, but even if you paid, say, a 3% balance transfer fee ($90), you`d still be saving a bundle not paying that interest charge every month. Without that interest fee you`d have a much better shot at paying the entire balance off before the 0% interest rate expires.
Less revolving debt is undoubtedly good for the American economy, while portfolio growth is good for business. Fitch Ratings believes that most credit card portfolios will see expansion in 2012 as the economy continues its recovery.