Have Consumers Really Learned Not to Spend on Credit Cards? Nope.

I wish I could remember who I was having the conversation with a year ago about consumers will have learned a fundamental lesson about how to manage money as a result of this economic downturn we’ve faced in 2007-2010. My point was that any trend downwards in credit card spending is temporary and if consumers are given a chance to ramp up spending, they will.

The other person was making the argument that the evidence of consumer reigning in spending was right in my face with the Federal Reserve reporting a declining balance of credit card debt owed.

I was just reading an article by Stephen Gandel, “What’s Worse: Stingy Banks or Thrifty Consumers?“, and he brought out an excellent observation on the Fed’s G19 consumer debt numbers.

A new study by CardHub found that while credit card debt did fall $93 billion in 2009, a cool $83 billion of that drop, or 89%, came from banks charging off loans, not, as people thought, from customers paying down balances. In fact, when you adjust for the charge offs, consumers actually loaded up their credit cards with an additional $21 billion in debt in the last three months of 2009 alone. – Source

So CardHub and Stephen Gandel deserve a pat on the back for pointing out this little nugget.

I’m not being cynical here and I believe that learning better money habits is a good thing but I’m an economic and consumer debt realist. And that reality is that once banks start to relax their grip on credit, consumers will be drawn, like drunk businessmen to a Vegas strip club, to spend. Okay, maybe that was a bad analogy but I just couldn’t use the old moth to the flame phrase again.

All things being equal, consumers will always be drawn to spending over savings because it meets so many unconscious demands and emotional wants. Don’t believe me, just take a walk down the aisles of behavioral economics textbooks to learn more about the voices in our heads which lead us to spend.

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Think about this, how many people get laid for being thrifty.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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