Consumers Optimistic About Economy and Spend More
Buoyed by gains in the stock market and low interest rates, consumers remain optimistic about the economy and have boosted their spending.
Revolving debt or credit card balances in September rose by 2% according to the Federal Reserve, a sign that consumers are confident about the recovering economy, but are shopping cautiously, said Matt Schulz, a senior analyst for Austin-based CreditCards.com. Total consumer credit rose by 6% in September and includes short-term revolving debt, car and student loans, but excludes mortgages.
“It’s an indicator that Americans are still feeling pretty good about things and comfortable enough to do some shopping,” he said. “Since we are far removed from the depths of the recession, it’s completely understandable you would ease into things.”
More consumers are taking out loans to purchase cars, as auto loan debt rose by $22.2 billion since June. Lower unemployment rates and a decline in the number of delinquencies for credit cards demonstrate that consumers are spending, but “still have a good handle on things,” he said.
“It is fairly measured growth,” Schulz said. “It will be interesting to see what happens once interests rates start to climb.”
Spending by Americans continues to be more focused on “experiential” activities, such as dining out, entertainment and travel, said MasterCard. Total U.S. retail sales increased by 3.9% in October, according to the Purchase, N.Y. credit card company’s latest report.
Consumers were more willing to purchase additional discretionary items since retail growth in October was led by the lodging, restaurant and electronic and appliance sectors. Airline, automotive repairs and tires and department store sectors were less sought after by consumers in October.
“We’ll watch for early November results to see which sectors stand to gain in the all-important holiday shopping season,” said Sarah Quinlan, senior vice president at MasterCard Advisors. “Based on trends over the past several quarters, those retailers who offer a more holistic experience between their physical stores and online marketplaces stand to be in better positioned out of the gates.”
Since revolving debt does not require that the entire balance be paid in full each month, but only a minimum monthly payment set by the issuer to keep the account in good standing, having a credit card can be useful for consumers, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, the Washington, D.C. non-profit.
The credit scoring model likes to see how borrowers manage both revolving debt and closed-end accounts such as car payments, but the repayment of the debt needs to be managed responsibly, she said.
Late payments can lower a credit score by as much as 100 points, and charging more than 30% of your credit line can not only lower your access to available credit, but also potentially lower your credit score.
“In a perfect world, people would never charge more than they could repay when the bill arrives,” Cunningham said. “Breaking this rule of personal finance results in paying interest on top of interest and often negates any savings from purchasing an item on sale. As we enter the holiday shopping season, consumers should first focus on paying debt down before adding to it.”
Making purchases with revolving credit means you’re paying more than you expect, unless you pay it off immediately, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a company which helps consumers with debt consolidation, resolution and settlement.
“Your $40 pair of jeans could wind up costing $80 if you take years to pay it off,” he said.
When consumers are feeling more optimistic, they sometimes spend too much and use their credit cards solely to pay for their purchases, which accounts for higher revolving debt totals.
Since most credit cards only require people to make a minimum payment, the interest accrues easily and adds to the total amount of debt.
“It’s smart to make purchases that are no more than what you can pay off in a given billing cycle,” Gallegos said. “This way you avoid paying excessive interest or building up debt.”
NEW YORK (MainStreet)–Ellen Chang