Ezra Becker

Are cash-strapped consumers continuing to borrow on their credit cards during the difficult economic times of the past several years? Or are they actively paying down their credit card balances and reducing revolving debt levels?

Ample data show that credit card balances have declined; according to the Federal Reserve, by over 16% from December 2008 to December 2010. The contention of some industry pundits, repeated by a number of credit card lenders and supported by back-of-the-envelope calculations, is that the entire reduction is due to charge-offs by creditors. Absent these charge-offs, the story goes, consumers have actually increased their credit card borrowings over this time.

However, a closer analysis of the data shows that conventional wisdom in this case misses the true story.

A recent analysis by TransUnion found that consumers actually made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010 (arguably the trough of the recent recession). While charge-offs certainly accounted for a significant portion of overall balance reduction, they were not the whole story: in fact, the $72 billion of estimated net repayments was not far below the $87 billion of charge-offs over this time. And in fact, the study stated that the $72 billion estimate was quite conservative—payments may have been as much as $110 billion more than purchases in that time frame, thereby contributing even more to balance reduction than charge-off did.

As was revealed in this study, consumers made a concerted effort to reduce their credit card balances over this time, with a majority of consumers who were either current on their payments or less than 60 days delinquent experiencing declining balances in the analysis. This paydown trend was consistent for consumers across the credit risk spectrum, though at different levels by credit score.

“It is also important to note that the drivers of deleveraging on an incident basis are different at various points along that credit risk spectrum,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Charge-off is a more predominant driver of deleveraging among subprime consumers. Among prime consumers, paydown is the major factor. Although it sounds simple, this is critical insight for lenders: it allows them to better understand the preferences of various sub-segments of consumers and respond appropriately to each.”

With a majority of consumers focused on paying down credit card balances and reducing debt, what are the implications for credit card issuers? Certainly a strategy of marketing new credit cards to the segment of consumers who are actively reducing credit card balances is likely a waste of time and money; with a majority of consumers currently paying down card balances, a card issuer could be wasting over 50% of its marketing spend making offers to uninterested consumers. Credit card issuers need to develop insights to identify those consumers who are currently paying down credit card balances and consider excluding these consumers from new card offers and promotions.

These same insights for cardholders within a lender’s current portfolio who are reducing balances can also prove valuable for retaining and even expanding customer relationships. An existing customer who is looking to reduce credit card balances may be a good candidate to cross-sell a savings account or debit card. Alternatively, customers with balances across multiple cards may be good candidates to consolidate their credit card balances with a single card, and a targeted offer or increased credit limit may enable a card issuer to capture a greater share of those customers’ share of wallet.

While an analysis showing that consumers are actively reducing their credit card balances may fly in the face of conventional wisdom, these insight present opportunities for savvy card issuers to use consumer behavior data to improve the results of their customer acquisition, retention and cross-sell activities. Here’s yet another example of where it’s good to listen to what the data have to say.

Ezra Becker is vice president of research and consulting in TransUnion’s financial services business unit.

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