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Consumers in U.S. Relying on Credit as Inflation Erodes Incomes

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  • Consumers in U.S. Relying on Credit as Inflation Erodes Incomes

    July 21, 2011

    Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.

    The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.

    “Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.”

    Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy.

    After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 percent and food climbed 2 percent during the same period.
    ‘Dramatic’ Swings

    The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year.

    The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.

    The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit card balances, increased by $3.37 billion to $793.1 billion in May from an almost seven-year low of $789.8 billion in April, figures from the central bank showed. The gain was equivalent to a 5.1 percent increase at an annual rate.

    The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.

    “People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.

    Core customers of Bentonville, Arkansas-based Wal-Mart Stores Inc. (WMT) are “cash strapped,” William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. “The paycheck cycle is severe.”

    Similarly, customers of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO) are living “paycheck-to-paycheck,” so when gas or food prices go up, “they don’t have the cushion that many others might have,” Chairman and Chief Executive Howard Levine said on a June 29 conference call.

    Changes within the industry may account for some of the recent stabilization in outstanding revolving credit as several banks have ended incentive programs for debit cards, while increasing credit-card solicitations this year, Tavares said.

    A possible bright spot is that inflation may moderate as prices of commodities stabilize, Fed Chairman Ben S. Bernanke said July 13 in his semi-annual testimony to Congress. As of July 19, the average price of a gallon of unleaded gas had dropped 7.6 percent from May 4, when it reached an almost three- year high.
    Bernanke’s View

    “The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster real household income, confidence, and spending,” Bernanke said.

    Confidence has a long way to climb for those in the lower- income brackets. The sentiment gauge for those making less than $15,000 a year was minus 66 in the week ended July 10 and was minus 69.6 for those earning $15,000 to $24,999, according to the Bloomberg Consumer Comfort Index. The comparable reading for households making more than $100,000 was minus 1.4.

    “For people to think that this rebound in credit-card usage is actually a sign of resurging consumer confidence, I think they’re looking at the situation backwards,” Rosenberg said.

  • #2
    What I find troubling in the story is the dramatic increase of credit card use by consumers just to buy gasoline. They are fueling up their cars with credit and are going to take the road down the bankruptcy route 7 or 11. When people can't afford to pay for their basic needs like gas, food, shelter, clothing out of the money they are making, how are they going to be able to afford to also pay their credit card bills also, when they come due?


    • #3
      it's just so scary!!!!

      borrowing from peter to pay paul...and it all snowballs so quickly, and people just don't even realize it until it hits them hard in the face, which comes soon after one begins to charge their "needs".
      8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! and all are welcome to bk forum's Florida State Questions and Answers on BK


      • #4
        Well, considering that we as a country don't produce much of anything anymore thanks to outsourcing, what do you expect? Wages have been going down for the past 10 years--and that's for those of us lucky enough to still have a job. And of course living expenses still continue to rise.

        So of course, people who are "running in the red" are going to have to put the shortfall on their credit cards. I know that I used my credit cards to cover the shortfall--rather than having to change my lifestyle downward--from 2003 to 2009. By the time I quit paying on them in March of 2009, the credit cards were mostly "maxed out" anyways.

        And I wasn't making frivolous expenses such as buying electronics, designer clothing, or anything like that. I was using the credit cards to pay for food, medicine, health care, fuel and upkeep for my car, and so on.

        I know that I made more money in 2000 than I did in 2009, the last year that I worked before getting fired and deciding to cut my losses and go to college. From 2001 to 2005, I lost several jobs--not because of poor performance on my part, but because the company decided to close the plant or division and move the work overseas.

        So forgive me if I fail to shed a tear for the billions in "losses" that the rich banks will incur when people like me file for bankruptcy!


        • #5
          interesting you should say that. there are some companies we have now (this family) stopped doing business with because of the outsourcing.

          but i have to say even this one surprised me. i sent our DIL a small $25 flower thingy for her birthday from FDT when went to follow up on tracking the order, i got india...that will be our last order with them. not that we order that type of item much. ( i'm sure they could have used the cash more, but i had forgotten it was her bday and was stuck).

          they say the union broke the companies and they moved their labor out. not so, it was only to line their pockets, after all, what do they care, their bottom line is, or was, in the USA they had to pay a decent wage, not one that made anyone rich, but left people at least with something called "pride". well now all those jobs they either paying children labor .50 an hour, or $2 and no benefits, nothing to those overseas and nothing to us either. nice.
          8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! and all are welcome to bk forum's Florida State Questions and Answers on BK


          • #6
            Unfortunately, it will catch up to them. There are stories everywhere describing folks who lost jobs, relied on the cards and whammo......what did they end up getting? Higher payments, raised interest and limits reduced by those theiving cc companies. But of course, they didn't do that until they got all that gov't money.

            I still say if the US had given the people that money back when they were handing it out, it would have boosted the economy. NOPE, they gave it to the banks, car companies and the other thieves.

            It's gonna get alot worse before it gets better!!!!! Wish it wasn't so but I haven't seen any recovery anywhere. Gas is once again rising, heating oil will probably be crazy and let's not forget the good ole grocey store.......ummmmmmmmm???????
            Filed CH 7 4/15/11
            341 5/23/11
            DISCHARGED & CLOSED ON 7/27/11


            • #7
              When the credit card companies start to cut their credit limits off due to their increased balances, then the "oh crap, now what the hell am I going to do" feeling is going to strike them. People doing this are guaranteed bankruptcy cases in the making. That is how I got here. lol Paying Peter to pay Paul does nothing but delay the inevitable and makes the situation worse then before.


              • #8
                Originally posted by Goteki45 View Post
                When the credit card companies start to cut their credit limits off due to their increased balances, then the "oh crap, now what the hell am I going to do" feeling is going to strike them. People doing this are guaranteed bankruptcy cases in the making. That is how I got here. lol Paying Peter to pay Paul does nothing but delay the inevitable and makes the situation worse then before.
                certainly does.

                we actually used our cc's for medical expenses. i remember i required another surgery and the doctor wanted 20k up front. i had a line of over 60k with b of a. so i called them and told them i would be charging a large amount in a few hours to a doctor and to put a note on the account. we had the full line available as we had just paid off 48k for the last surgery that we had charged on that card.

                well, by the time i got the doctors, b of a, after doing business with them over 30 years cut our line to nothing. no notice we had never been late..the whole story. we had to put the 20k between 4 other cards..what a mess. by the time we filed bk we had over 200k worth of medical expenses approx..and i don't remember the exact amount but i would say approx. 110k or so on the cards for the medical expenses...NOT dinners, or cars, or clothes or vacas.

                it sure did make the situation worse after we both lost our long standing upper management jobs and used all our savings to pay bills and keep afloat...i knew better but used our 401 for the bills since we needed the money for medical reasons that couldn't wait. what a trap.

                we try not to look back just forward now, but while i had no problem leaving our home of 33 years, or selling everything we owned to make a move to a state where we could afford to live on a small pension, it was so say the least a difficult adjustment more mentally exhausting then anything else. but, now, i know it was the right decision and we are happier today that we have been in too many years to remember. bk was really a restart button for our lives.

                i will be honest though, we do have cc's but ONLY use them for example for a major car repair or something along those lines of expenses for the reason, if something goes wrong we can dispute the charge. we thought we could do that with our debit card, but we use it solely for repairs or again something that we need to watch for 30 days or so to make certain everything is ok. then we pay it in full so we don't have any interest to pay. (we have only used it 3 times or so) but that will be the ONLY reason we ever use credit again.
                8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! and all are welcome to bk forum's Florida State Questions and Answers on BK


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