For consumers – at least when it comes to confidence that they can handle rising credit card debt in the face of inflation and even live paycheck to paycheck: watch what they do, not what they say.
Faced with consumer prices rising at a rate not seen in 40 years, consumers are increasingly turning to plastic (well, digital cards too) to meet their living expenses, to bridge the gaps in purchasing power that arise when prices rise faster than income.
Presumably, the cash cushions that have been built up during the pandemic have not been sufficient to support spending; while the savings haven’t been exhausted, the paycheck-to-paycheck economy demands that consumers use every tool at their disposal to make ends meet — and splurge a little.
Not too long ago, as recently as 2021, debit spending vastly outpaced credit card spending, where consumers wanted to spend the cash they had on hand, while paying off loans on credit card (until recently, when this debt spiked in late 2021). Now the tables have turned a bit and the pace of credit card spending has picked up, eclipsing the growth in debit. In part, consumers may have felt relatively healthier about their financial situation in recent months; credit is more likely to be a defense against inflation.
Earnings results have been strong, with big names in banking showing that in many cases spending has returned to levels not seen since before the pandemic. According to the figures, JPMorgan Chase said spending, using credit cards as a channel, increased by 29%. And, according to the commentary on this earnings call, credit quality is strong. Chief Financial Officer Jeremy Barnum said the company “continues to see positive trends” as travel and entertainment spending grew, rising 64% in the last quarter.
Read also: JPMorgan adds more than $1 billion to loan loss reserves as economic threats mount
Separately, Wells Fargo saw consumers on its own credit cards increase by 33%. Bank of America earnings release Monday (April 18) show credit card spending grew 25%, outpacing debit card spending growth of 9%.
Read more: Wells Fargo posts lower revenue and home loans
And to get a sense of how fast the “round trip” is, BofA’s own results show that retail spending in the first quarter of 2021 was 37% higher than in the first quarter of 2019; food expenditure was 25% higher.
Today, part of that growth is due to inflation which, as almost everyone knows, is at rates not seen in four decades. But some of the growth is organic, representing pent-up demand as economies reopen. It remains to be seen how long all this can last.
Trust in cards
PYMNTS’ own data, as seen in “Digital Economy Payments April 2022 US Edition How Consumers Pay in The Digital World,” shows that, for example, just over 31% of grocery purchases were made by card. credit, up about one percentage point from a year ago.
Read here: New data shows consumers are buying less, spending more and changing their habits
Confidence in the use of credit cards at the point of sale comes as consumer expectations of what to expect have been decidedly negative. The University of Michigan Consumer Confidence Index showed a recent reading of 59.4 in March, down more than 5% from the previous month. Inflation, of course, is a priority. But then again, wallets keep opening up, especially for travel, where 19% of consumers spent money on getting away from it all in March – a record since the monthly survey series began in December. .
One wonders how long all this can last. Separate research from PYMNTS found that 62% of the population lives paycheck to paycheck, a demographic that now includes half of consumers who earn more than $100,000 a year. The cash cushions that have been built up over the past few years could come under pressure. For those earning $100,000 but struggling to meet spending obligations, the average savings is just over $11,000. For the paycheck consumer earning $50,000 or less, the savings amount to $788.
For now, as the big banks tell us, consumers are content to buy now and pay for everything later. But the banks themselves seem to be preparing for a rainy day – at some point. JPMorgan, as we reported, increased its loan loss reserves by $902 million, where previously it had released those reserves into earnings. In Bank of America’s latest results, the company said it increased its own provisions on its consumer business by $14 million in the quarter. The reserve now stands at $3.1 billion.