Consumers aren't letting go of their debit cards just yet, but an improving economy is motivating some of them to dust off their credit cards, MasterCard Inc. says.
Credit card volume rose by $172 billion last year, for an 8.4% increase over 2011, according to MasterCard's annual U.S. Insights report, released last week. Debit and prepaid card volume grew by $129 billion, but MasterCard's research reveals that nearly $8 billion shifted to credit cards from debit and prepaid products.
Despite this shift, "credit and debit are both growing," says report author Nitin Sumangali, global insights analyst for MasterCard. "One does not grow at the expense of the other, as it is a case of consumers feeling more confident about the economy and moving back and forth between debit and credit."
Total credit card spending for 2012 was at $2.2 trillion, with total debit spending at $1.9 trillion.
The shift from debit to credit marked a reversal of the early years of the financial crisis, 2008 and 2009, when approximately $141 billion shifted from credit to debit card spending, the report says.
MasterCard's findings came out the same week in which Auriemma Consulting released a study indicating that even though many consumers prefer debit cards, banks could steer those customers to credit cards with better marketing pitches.
In addition to reviewing public records and payments industry data, MasterCard surveyed 1,500 consumers through February and March for its study. Those surveyed were not chosen from MasterCard's issuing banks' databases. "They were just general consumers," Sumangali says. "It did not matter what type of payment cards they were using."
MasterCard divided the consumers surveyed into two groups those considered "credit worthy," generally older and possibly retired; and those labeled as "credit on the edge," younger and less affluent consumers.
Both segments were borrowing money through credit cards more confidently last year, though possibly for different reasons, the study says. "Credit on the edge" consumers may have spent more as a result of pent-up frustration with the slow recovery, so their spending habits are considered fragile. The credit-worthy were not hurt as badly by the economic slowdown and they simply seek better ways to manage their funds.
The report cites Federal Reserve data that charted a rise in credit card debt from 2011 to 2012 at $2.8 billion, or 0.3%. The Fed's monthly consumer credit G-19 report bears this out, showing $842.5 billion in revolving consumer debt at the end of 2011 and $845.8 billion at the end of 2012. Non-revolving credit card debt, or those dollars generally not carried over into extra bill-paying periods, was at nearly $2 trillion at the end of 2012.
The study confirms that banks' rewards programs fuel credit card spending, Sumangali says. In 2011, 38% of respondents said rewards programs were important for their credit cards, and that figure grew to 46% in 2012.
"Historically, relationship banking is a way for the banks to get more integrated with their customers," Sumangali says.
MasterCard asks the same survey questions each year to better compare annual consumer behavior and perceptions, Sumangali says.
"There is no doubt consumers are more confident now," Sumangali says. "They have a better understanding of their own financial picture and that drives confidence."
Banks can benefit from even small advancements in credit card spending and consumer confidence by helping customers understand how the bank's products work for them and the best way to use them, he adds.
As expected, cash continues to lose ground to card payments. MasterCard's research shows. Part of debit card spending growth can be attributed to $93.1 billion in spending that shifted from cash to debit over the past four years. Debit card spending has grown 44% since 2008, compared to 14% for credit card spending, the report says.
Despite numbers that indicate more credit card spending, banks must still contend with a sluggish economy, issues related to the Card Act, rising credit lines and risk-based pricing, says Brian Riley, senior research director and analyst with Boston-based CEB TowerGroup.
The Card Act of 2009 essentially put safeguards in place for consumers against penalty fees or interest rate hikes without full disclosure.
"I wouldn't say that use of credit cards is consistently growing, nor has there been a massive change in consumer behavior," Riley says. "The statistics can be cut into many different verticals."
The most recent figures from the G-19 indicate that the amount of credit card spending and debt continues to fluctuate and remains far below the $1 trillion figure at the end of 2008 before the recession deeply took hold, Riley says.
Sumangali acknowledges as much, saying, "Consumer fear is much lower now, as they have a greater sense of financial stability, but things are not as good as they would like them to be.
"They have to take the longer view on the economic data, which shows that all aspects start to improve," he adds. "It's a jagged line, moving upward."