Are credit card portfolios poised to begin growing again?
A new Fitch Ratings Inc. report suggests the Durbin amendment, which essentially halved debit card interchange revenue for debit card issuers when it went into effect Oct. 1, could provide a boost to total revolving credit, which has been on the decline for the past few years.
Lenders can expect "modest portfolio expansion" this year after several quarters of retrenchment, as credit card purchase volume rises and more consumers shift everyday spending from debit to credit cards, Fitch said in a March 29 report.
Credit card portfolios "hit bottom" last year as issuers' receivables declined following the recession, Fitch noted. Card outstandings declined because of a combination of factors, including consumers being more frugal and lenders restricting credit lines.
Fitch sees bluer skies ahead, based on a combination of recent "meaningful" credit card purchase-volume growth plus new indications that consumer revolving credit is beginning to grow.
Credit card purchase volume on average rose by 7.6% in 2010 and by 9.7% in 2011 for the top seven U.S. credit card issuers while total U.S. card receivables contracted 8% and 1.6% respectively, Fitch said.
One reason is that consumers are engaging in "a more-sophisticated use of credit card rewards programs," driving more cardholders to become "transactors" instead of "revolvers," who use credit cards for everyday purchases and pay off balances in full each month, the firm said.
Under the Durbin mandate, the new Federal Reserve rules that capped debit interchange caused many issuers to eliminate debit card rewards programs, Fitch noted. That phenomenon "is also likely to support increased transactor activity on credit cards" this year as consumers shift more routine spending from debit to credit cards, Fitch said.
Total consumer revolving credit, 98% of which is credit cards, generally has declined over the past few years despite occasional short-term upticks.
The total in January stood at $800.9 billion, down 0.36% from $803.8 billion in December, according to Fed data. The Fed is slated to report new monthly revolving-credit data during the first week of April.
But Fed data show that, on a linked quarter basis, consumer revolving credit grew at an annualized rate of 6% in the fourth quarter of 2011, the strongest growth since the first quarter of 2008, Fitch noted.
"American Express, Capital One and Discover all posted modest portfolio growth at the end of 2011, and we believe most portfolios will expand in 2012," the firm said in the report.
The recent increase in the annualized growth rate for revolving credit could be significant if it is sustained, Meghan Neenan, a senior director in Fitch's financial institutions research, tells PaymentsSource.
"In general, revolving credit has been coming down since 2008, and the recent quarterly increase suggests a change," she says.
Also noteworthy is that, unlike before the recession, "revolving credit no longer includes a lot of home equity loan balances,” Neenan says. “Today it is really the actual credit card balances that are driving any receivables growth we see."
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