Appetite for credit fuels billion-dollar industry

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For some, credit cards provide freedoms that otherwise may not be possible. They are handy in a pinch and instrumental in establishing credit, the building block to a new home or car, cheaper insurance — even a job. And with more consumers capitalizing on rewards programs, many are using credit cards to take some of their money back.

The U.S. credit card industry is worth nearly $1 trillion and is a ubiquitous part of American culture. But when the bills arrive, many people may realize how little they know about what’s in their wallet.

‘A good thing’

An estimated 167 million Americans have at least one credit card, each contributing to the more than $884 billion owed to creditors as of February 2015.

That debt, according to the Federal Reserve, means the average household owes nearly $7,300 to credit companies alone, one piece of the nearly $12 trillion in total household indebtedness. While that number is daunting, Kevin Weeks, president of the Financial Counseling Association of America, said credit card delinquency is at an all-time low.

The FCAA, formerly the Association of Independent Consumer Credit Counseling Agencies, was founded in 1993 and is made up of nonprofit member agencies that provide financial advice, including managing credit, for its clients.

“Delinquent credit card debt has gone down significantly, and that’s a good thing,” Weeks said. “One positive that came from the recession we just went through is that people pay more attention to their finances. They aren’t so apt to spend without knowing they can pay it back. But it’s a double-edged sword. Credit is important for our country, and people want to be comfortable knowing they can purchase on credit, pay their bills in a reasonable amount of time with reasonable interest rates and not just stuff funds under their mattress.”

According to Weeks, creditors are beginning to soften lending stipulations as a result of the rebounding economy, but many consumers still carry significant debt.

“We see a lot of people who have fallen behind on their credit cards,” he said. “We try to get to people as early as we can and be proactive rather than reactive.”

Weeks said many people struggling with debt aren’t necessarily irresponsible spenders.

“They’re not traveling around the world,” he said. “It’s usually that they don’t have enough savings or an emergency fund, and they lose their job or their hours are cut back or they have a medical emergency and they reach for their credit card. Then they can’t pay the balance in full and have to reach for it again and again and again.”

Cautious revival

In 2009, at the height of the recession, the Credit CARD Act was signed into law by President Obama. The act outlawed abusive practices, including rate hikes on existing balances or allowing a cardholder to exceed spending limits and then imposing a fee.

The law also aimed for transparency, so consumers could understand exactly how much their credit card was costing them and allowed them to better compare different cards.

Weeks said, since 2009, credit card marketing has increased and standards have relaxed, but issuers are still cautious.

“[Credit card] companies are being more careful coming out of the recession and offering fewer cards. The Credit CARD Act doesn’t push [companies] into a corner, but it definitely restricts who they can issue cards to. That includes students. In the past they were on college campuses and … would push students into cards, and they can’t do that any longer.”

Data provided by the Consumer Financial Protection Bureau indicates an increase in post-recession credit card marketing.

“The total number of mail solicitations more than doubled between Q4 2009 and Q4 2010 and the percentage of consumers who were offered a credit card increased throughout 2010, with the largest increase occurring within the midprime segment,” the CFPB website states, adding, “Credit is increasingly available to consumers with lower credit scores. The percentage of overall new accounts represented by midprime and subprime consumers doubled between 2009 and 2010, from 13 percent to 26 percent. By way of comparison, in 2007 — before the start of the recession — 39 percent of new accounts came from these segments.”

Weeks said he does not believe subprime lending will reach prerecession levels, but added, “creditors will start providing and extending credit more leniently, since they’ve kept their credit card portfolio at bay. … Banks make a significant amount of money on credit cards, whether from the consumer or retail transaction fees.”

A web of debt 

In the summer of 2010, student loan debt surpassed credit card debt for the first time. Weeks said, while credit card debt is now third to mortgages and student loans, all debt is interconnected. He indicted student loans as a driver of credit card debt.

“Credit card debt goes hand-in-hand with student loan issues,” he said. “Former students have significant loan debt and are barely getting by. A lot of indebtedness has moved to other places like student loans. There needs to be a significant change in how we pay for college — something like a Credit CARD Act for education.”

Weeks said the student loan epidemic affects demographics beyond the recently graduated.

“The student loan issue is coming to a head, not just the debt but how it’s impacting other parts of the economy,” he said. “Housing is impacted because those with significant loan debt are reluctant to purchase a home. Student loan debt impacts the elderly. Hundreds of thousands of dollars in Social Security is garnished for student loan debt. Parents who have cosigned for loans are taking a hit.”

Weeks added that, regardless of the type of consumer debt, one simple practice is necessary to gain financial stability — a budget.

“That’s the basis for every counseling session,” he said. “Many times people don’t know what their budget is. They know sort of what they make because they have direct deposit, but they don’t know what is being withheld … and they generally are not dialed into their expenses. … They don’t know what they’re spending their money on and what the latté every day looks like over a month. The budget is the basis of financial literacy.”