Credit union executives planning credit card marketing and issuing strategies for 2012 and 2013 may want to factor a new study from TransUnion into their deliberations.
TransUnion, one of the three national credit bureaus, reported that its analysis of consumer debt data collected by the Federal Reserve indicated that the drop in credit card balances nationally since 2009 had more to do with consumers paying down their card balances than from card issuers charging off delinquent accounts.
The research suggested that consumers' behavior with cards, at least across that year's period, may have significantly changed.
The conventional wisdom among many card analysts and some card issuers has been that balances dropped nationwide due to issuers charging off delinquent accounts and that consumers with active accounts had been actually continuing to add to their card balances.
"Many people in the financial services industry believe charge-offs have been the leading factor in declining credit card debt since the start of the recession," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "In fact, some have stated that charge-offs account for the entire change in card balances over the past two to three years. In reality, the dynamic is more complex. Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times."
TransUnion reported that just five years prior to the its analysis, consumers had made an estimated $2.1 billion more in purchases than payments. That constitutes a nearly $75 billion turnaround in consumer payment dynamics from 2004 to 2009.
"This reversal is even more profound when you consider that alternative forms of revolving credit, e.g. home equity lines of credit, were far more accessible in 2004 than in 2009. So while charge-offs have played a major role in lower credit card debt levels, it was not the only factor. Consumers were also paying down their debt across the risk spectrum," added Becker.
According to the analysis, which TransUnion described as "conservative," consumers made more than $72 billion more in payments on their credit cards between the first quarter of 2009 and the first quarter of 2010 than they made purchases with those cards. The firm said that if it used less conservative assumptions, consumers made more than $110 billion in payments than purchases on their cards during the same period.
In an interview with Credit Union Times, Becker stressed that TransUnion was not arguing that charge-offs had played no role in the balance decline, just that they were not the only factor.
"Charge-offs clearly played a very significant role, but they were not the only thing going on," Becker said, adding that the firm believed the its clients needed the closer analysis in order to have the data to make better card issuing and management decisions.
In order to check its calculations, Becker said TransUnion conducted analysis of the data at both the national level as well on a per account basis. On a per borrower basis, TransUnion reported that average credit card debt declined more than $600, moving from $5,776 to $5,165. As of the end of the first quarter of 2011, average credit card debt per borrower stood at $4,679, a 10 year low, the firm said.
Becker also noted that TransUnion was not arguing that consumers had necessarily made their pay down decisions on their own.
"In many cases, issuers were trying to limit their credit risk and lowering credit limits, so there were some borrowers who couldn't have added to their credit limits even if they wanted to," Becker pointed out.
TransUnion also noted that the percentage of pay down versus charge-off varied depending on where a borrower fell on the spectrum of credit eligibility.
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