Consumers are returning to credit in droves. Some people are using it just for entertainment while others are relying on credit cards for most or all of their daily needs.
Simone Bernstein, 20 and a college student, is in an interesting predicament. She has received an impressive internship (that barely pays) in New York City but, obviously, does not have the means to afford the cost of living in one of the “largest” cities in the world. Thus she plans to use your credit cards to offset living expenses just to survive. She said:
My payoff plan is in the long run. I hope I can make money during the year, whether it’s working in the library and find other ways during school.
School, of course, is Bonaventure University in west-New York, where she is premed; and she is not alone in this hope. Indeed, consumers in the United States seem to be returning to credit cards of late, charging more to their cards in May of this year than in any other month since November 2007, as recounted by Federal Reserve data released this Monday.
According to Silvio Tavares, division manager of First Data Global Information and Analytics Solutions,
During the month we saw consumers reducing the growth of their discretionary spending at retail merchants and increasingly resorting to credit for necessities.
Fittingly, though, discretionary spending for things like hotels, retailers, restaurants, and bars went down, which is a good sign of savvy consumers in a down economy. Still, though, categories like value retailers and discount stores increased, which may also be indicative of smarter consumers trying to get the most for their money.
Yoel Eis, for example, is a typical representative of this demographic. At 28, he is a college financial aid administrator in New York City, and he uses plastic for just about every expense he has. From car payments to insurance to gas, groceries, and day care, he charges everything to his credit cards. This even includes a $66 payment to his synagogue for membership.
Smart consumers, like Eis, are opting for credit cards instead of cash despite having more than enough liquidity. He says that he prefers this method of payment simply because you can earn rewards, improve your personal efficiency, and track your spending. Of course, this comes at the expense of having to constantly follow your accounts online, but consumers who believe in this philosophy do not seem to care so much about that. Those consumers who are vigilant, then, this could pay off in a big way.
Most people in the financial world would attest that this development is a positive sign that the economy is on the rebound. Indeed, Americans have usually only increased credit card use when they have faith in the credit system and thus are a little more courageous about using credit. Of course, economists warn that this trend might actually indicate quite the opposite: that American consumers are, in fact, broke and choose to use credit cards to pay the bills.
Consumers who are not quite so vigilant, then, could quickly spiral their credit situation out of control. Consumers on a tight budget, for example, may not be able to juggle multiple credit card payments every month. Obviously, this results in more fees and will quickly diminish your credit benefits.
Another problem that increased credit card use could indicate, though, is powerful marketing from credit card companies to steer consumers away from debit cards. Since the Durbin Amendment to the Dodd-Frank financial reform reduced the amount banks could charge in debit card swipe fees, these institutions have been looking for new ways to get people to use credit cards once again. Perhaps they have found the way.