The credit situation in the U.S. remains grim, with credit card balances getting higher while access to credit and credit limits are decreasing, according to a new study from Synovate's Mail Monitor. This could spell trouble for retailers this holiday season.
U.S. credit card balances increased to $8,083 in Q3 2009 from $7,489 in Q2 2009, according to Mail Monitor, the credit card direct mail tracking service from global market research company Synovate. As credit lines are cut, consumers are moving their balances to their other cards, causing an increase in the mean balance on the cards that carry a balance.
A significant proportion of credit card accounts are being closed, either by issuers or by the consumers themselves as a result of change in terms proposed by issuers, including higher interest rates, according to Anuj Shahani, director of competitive tracking services for Synovate's Financial Services Group.
"This was inconsequential initially as issuers were mainly cutting lines on inactive accounts or for transactors, people who pay their balance in full each month," Shahani says. "Recently, we are seeing many issuers reduce credit lines on active accounts or for revolvers, people who do carry a balance each month. This can put many households in a risky situation."
For example, if a household with $25,000 in credit lines across all their cards has one of their $10,000 limit cards cancelled, the credit limit for the household is reduced to $15,000. If they were to revolve on one card with $5,000 as an outstanding balance, their utilization ratio (ratio of outstanding balance to available credit limit) increases from 20% to 33%.
A utilization ratio above 30% is considered risky by the industry and this makes the household a credit risk in the eyes of most issuers, potentially triggering further reductions in their existing credit limits, making matters even worse.
Credit limits have continued to drop since the beginning of the year as consumer credit has become harder to access. U.S. households had $26,657 in available credit in Q3 2009 vs. $28,005 in Q2 2009, a drop of 5%. As the pace of new acquisition slows, fewer households can add new credit cards to their wallets.
In addition, only 35% of U.S. households received a credit card solicitation in Q3 2009 versus 40% in Q2 2009 and 60% during Q3 2008.
"This is less than half of what the norm was prior to this credit crisis. Not only are fewer households getting offers, those that still receive offers tend to get fewer of them," Shahani adds.
Many new card offers now carry an annual fee (30% of the offers in Q3 2009 carried an annual fee versus 28% in Q2 2009). A recent Consumer Confidence Survey conducted by Synovate reported that 15% of consumers said they would cancel all their credit cards if charged an annual fee and 38% said they would keep only one card or cancel the ones they do not use. Another 24% of consumers said they would look for a card with a lower fee and the rest would take no action.
"Whenever you have a situation where less than a quarter, at best, of customers feel secure, and the rest are either in the process of canceling their cards or intend to find a new one, it's reasonable to conclude that the credit card situation remains dire," Shahani says.