Credit Card Debt Decline Driven by Consumer Payments, Not Charge-Offs: TransUnion

A new TransUnion analysis found that consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010.  This is in contrast to the belief that charge-offs (where creditors write off debt that they deem is uncollectable as a loss) were the primary driver of lower credit card balances.

“Many people in the financial services industry believe charge-offs have been the leading factor in declining credit card debt since the start of the recession,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “In fact, some have stated that charge-offs account for the entire change in card balances over the past two to three years. In reality, the dynamic is more complex. Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times.”

Just five years prior to the TransUnion analysis, consumers had made an estimated $2.1 billion more in purchases than payments. That constitutes a nearly $75 billion turnaround in consumer payment dynamics from 2004 to 2009.

“This reversal is even more profound when you consider that alternative forms of revolving credit, e.g. home equity lines of credit, were far more accessible in 2004 than in 2009. So while charge-offs have played a major role in lower credit card debt levels, it was not the only factor. Consumers were also paying down their debt across the risk spectrum,” added Becker.

On a per-borrower basis between Q1 2009 and Q1 2010, average credit card debt in the U.S. declined more than $600 from $5,776 to $5,165.  As of the first quarter of 2011, average credit card debt per borrower stood at $4,679, representing a 10-year low.

A majority of consumers either current on their payments or less than 60 days delinquent saw declining balances in the analysis. This was evident across the credit risk spectrum.  The analysis viewed anonymized credit files using the TransUnion Account Management 3.0 scoring model (150-900 scale).

“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,” continued Becker.  “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.”

The TransUnion analysis of credit card deleveraging complements and adds additional insight into research conducted by the Federal Reserve on noncash payments. Released in December 2010, that study revealed that the use of credit cards to pay for purchases declined in 2009, and that debit card usage now exceeds all other forms of noncash payments1.

This trend also was supported by an IBOPE Zogby International survey commissioned by TransUnion in early June.  Approximately 55% of consumers said they chose to use their debit card over their credit card more than half the time when making daily purchases.  In fact, 47% of respondents said they did so more than three out of four times.  Another 8% of respondents said they chose to use their debit card over credit card 51-75% of the time.

“All things being equal, we believe that consumers, especially younger adults, will continue to have an increasing preference to use their debit cards over credit cards,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit.  “However, the credit/debit card landscape is still in transition. Regulatory and legislative proposals either currently under discussion or recently enacted will impact the industry significantly and could alter this payment preference trend. Thus, consumer credit use and behavior should be closely monitored in the coming years.”

Study Methodology
The study reviewed data from TransUnion’s database, the Federal Reserve G.19 report and interest rate information from Bankrate.com between Q1 2009 and Q1 2010 to perform the deleveraging analysis. Approximately 1.65 million credit card accounts that were less than 60 days past due as of the end of Q1 2009 were included in the study. Their balance trends were evaluated as of the end of Q1 2010, and delinquency was monitored over the intervening 12 months. The consumers holding these accounts were scored as of the starting date using the TransUnion Account Management 3.0 scoring model, so balance behavior could be analyzed across the risk spectrum.

As a global leader in credit and information management, TransUnion creates advantages for millions of people around the world by gathering, analyzing and delivering information. For businesses, TransUnion helps improve efficiency, manage risk, reduce costs and increase revenue by delivering comprehensive data and advanced analytics and decisioning. For consumers, TransUnion provides the tools, resources and education to help manage their credit health and achieve their financial goals. Through these and other efforts, TransUnion is working to build stronger economies worldwide. Founded in 1968 and headquartered in Chicago, TransUnion reaches businesses and consumers in 23 countries around the world.