Thursday, 31 July 2008

Credit Cards Contracting

From Javelin Strategy and Research:

“The sharp decline in credit card spending challenges the popular belief that more Americans are charging basic goods in order to sustain their quality of life,” said Jim Van Dyke, president of Javelin Strategy & Research. “Consumers are making deliberate cutbacks like shopping at superstores, eating out less and watching what they charge. We believe this is because most people have already been impacted by the downturn or they’re anticipating that we haven’t seen the worst of it. It’s very cautious behavior.”

Javelin analysts also found significant cutbacks among credit card issuers. Seven out of ten issuers have reduced efforts to solicit new customers and 62% have cut back the lines of credit they make available to consumers.

“From declining consumer use, rising risk levels, and possible new merchant fee legislation, the credit card industry is taking several hits right now, which could have unintended consequences on Americans,” said Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research. “If the economy continues to decline, consumers will likely be forced to turn to credit, but find it unavailable when they need it most.”

Tomorrow I'll be writing about debt deflation and how contractions in credit intensify into a deflationary spiral. Hint: It starts when the middle class gets squeezed so hard by wage stagnation that it can't support any more debt.


Anonymous said...

You do a great job. Great blog.

I'd question (not challenge) the Javelin research because it's based on a survy of 1500 people. That, IMO, doesn't seem statistically significant.

Anonymous said...

Where I live there are streets with the letters WPA printed on them. WPA is short for Works Progress Association, a Depression-era program.

My grade school aslo had a chimney in it.

Why? Back in the 30's, the masons (working for the WPA) required a chimney to heat the bricks for the school.

clark said...

I think it was Works Progress Administration (WPA).

Max Ray said...

Credit card contracts directly implicate both of those literature because the contracts are complex both in their literal form and in their economic substance. Two features of the context make credit card contracting more problematic than other consumer credit transactions. The first--suggested by the description of my account activity--is that Credit cards have their effect in a large number of small transactions, each of which is so insignificant as to make careful consideration and calculating reflection impractical. Second, and more fundamentally, the transactions occur over an extended period, during which the business conditions that confront the issuer are likely to change. What that means is that the terms on which the issuer extends credit and seeks repayment will need to change over time. Because it is not cost-effective to engage in a separate contracting ritual for each purchase, the result in practice is a set of terms that are defined by the issuer and changed with surprising frequency (often without meaningful notice to the user). To understand the difference, consider a home mortgage transaction. If a consumer makes a mistake in a home mortgage transaction, the consumer does so when she signs the documents, a point on which all of the financial considerations of the relation turn.