As more and more lower income folks can’t pay those usurious credit card bills, more bankruptcy filings may be in the offing. This news story lays it out for us.
Consumers in U.S. Relying on Credit as Inflation Erodes Incomes
By Anna-Louise Jackson and Anthony Feld – Jul 20, 2011 11:00 PM
Consumers in the U.S. are increasingly using credit cards
to pay for basic necessities as income gains fail to keep pace with rising food
and fuel prices.
The dollar volume of purchases charged grew 10.7 percent
in June from a year ago, while the number of transactions rose 6.8 percent,
according to First Data Corp.’s SpendTrend
report issued this month. The difference probably represents the increasing
cost of gasoline, said Silvio Tavares, senior vice president at First Data, the
largest credit card processor.
“Consumers, particularly in the lower-income end, are
being forced to use their credit cards for everyday spending like gas and
food,” said Tavares, who’s based in Atlanta.“That’s because there’s been no
other positive catalyst, like an increase in wages, to offset higher prices.
It’s a cash-flowproblem.”
Rising costs of food and gasoline are leaving Americans
less money to spend discretionary items, slowing the pace of the recovery,
Tavares said. Household spending accounts for about 70 percent of the world’s
largest economy.
After-tax income adjusted for inflation fell 0.1 percent
from January through May, according to figures from the Commerce Department.
The drop came as Labor Department data showed energy prices rose 8.2 percent
and food climbed 2 percent during the same period.
‘Dramatic’ Swings
The swings in purchases of fuel and food have
been“dramatic,” Tavares said. The volume of gasoline purchases placed on credit
cards jumped 39 percent last month from a year earlier, compared with a 21
percent increase in June 2010, he said. Food shopping increased 5 percent after
falling 7 percent last year.
The value of an average transaction on credit cards
outpaced the gain for debit cards, showing consumers
are increasingly relying on borrowing to pay for gasoline and other
necessities, Tavares said.
The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit
card balances, increased by $3.37 billion to $793.1 billion in May from an
almost seven-year low of $789.8 billion in April, figures from the central bank
showed. The gain was equivalent to a 5.1 percent increase at an annual rate.
The use of credit cards is a “smoking gun” that indicates
some consumers, including the long-term unemployed who have lost jobless
benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff
& Associates Inc. in Toronto.
“People on the margin are putting necessities on their
credit cards and this is a trend that’s very consistent with what lower-end
retailers have been saying about their paycheck cycles,” Rosenberg said.
‘Cash-Strapped’
Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash
strapped,” William Simon, U.S. stores chief, said at a June 15 conference
hosted by William Blair & Co. “The paycheck cycle is severe.”
Similarly, customers of Matthews, North Carolina-basedFamily Dollar Stores Inc. (FDO) are living
“paycheck-to-paycheck,”so when gas or food prices go up, “they don’t have the
cushion that many others might have,” Chairman and Chief Executive Howard
Levine said on a June 29 conference call.
Changes within the industry may account for some of the
recent stabilization in outstanding revolving credit as several banks have
ended incentive programs for debit cards, while increasing credit-card
solicitations this year, Tavares said.
A possible bright spot is that inflation may moderate as
prices of commodities stabilize, Fed Chairman Ben S. Bernankesaid July 13 in his semi-annual
testimony to Congress. As of July 19, the average price of a gallon of unleaded
gas had dropped 7.6 percent from May 4, when it reached an almost three-year
high.
Bernanke’s View
“The anticipated pickups in economic activity and job creation, together with the expected easing
of price pressures, should bolster real household income, confidence, and spending,” Bernanke
said.
Confidence has a long way to climb for those in the
lower-income brackets. The sentiment gauge for those making less than $15,000 a
year was minus 66 in the week ended July 10 and was minus 69.6 for those
earning $15,000 to $24,999, according to the Bloomberg Consumer Comfort Index.
The comparable reading for households making more than $100,000 was minus 1.4.
“For people to think that this rebound in credit-card usage is
actually a sign of resurging consumer confidence, I think they’re
looking at the situation backwards,” Rosenberg said.
Source: Bloomberg
