Are you going to pay with cash or credit?
The Associated Press reports that for more and more consumers in the U.S., who have already maxed out their credit cards or are just trying to manage their spending better in this tough economy, the answer is CASH!
Wal-Mart Stores Inc., Target Corp. and J.C. Penney Co. are noticing a marked shift away from credit cards in favor of cash and debit cards. A big factor is less available credit, as major card issuers cut spending limits and raise fees even for customers who pay their bills on time.
The shift ends the typical consumer’s long love affair with credit cards. It is one of the changes in consumer behavior that has emerged since the financial meltdown that will depress consumer spending this holiday season and affect shoppers’ habits long afterward.
Particularly during holiday seasons past, shoppers could count on a pile of plastic to give them the extra financing needed to splurge on presents before they had to face the bills in January or later.
But even when the economy recovers and credit loosens up, analysts say Americans — shaped by what could be a deep and long-lasting recession — are likely to stick with buying only what they can afford, just as their parents or grandparents did after the Great Depression.
“I think this is a new way of life,” said Robert Smith, of Loves Park, Illinois, who along with his wife has been using cash and debit cards to finance their spending, including vacations, since they paid off their credit card debts in July. “I like to be able to know that we paid for something. I hate monthly payments when you use a credit card.”
Smith, who has four children ages seven to 13 and owns a motivational training company called Drive and Grow Rich, says his business is down 20 percent this year, and since he is saddled with a mortgage, he doesn’t want to get back into debt.
While the credit crunch is teaching consumers to be more “financially prudent,” it’s creating a lot of pain for both consumers and stores, said Curtis Arnold, founder of CreditRatings.com.
One sign of how strapped consumers are for credit — and that they are buying only what they have the cash for — is that for the first time in 17 years, Penney’s has seen swings in spending around payday cycles over the past three months.
At Wal-Mart, the volatility in spending around payday — a drop in spending in the days before, followed by spending bursts right afterward — has become even more pronounced since September. Chief financial officer (CFO) Tom Schoewe told The Associated Press that
Eduardo Castro-Wright, president and chief executive of Wal-Mart’s U.S. division, told investors last month that credit card payments as a percentage of total payments fell 7.4 percent so far in the current fiscal year, which ends in January. That’s a big reversal from the robust double-digit growth rates in credit cards over the past three years, he said.
At JCPenney’s, Hicks said that use of the company’s store credit card was flat during the third quarter. The use of credit cards issued by other parties declined by a couple of percentage points as a percentage of overall payment, he noted, while cash was up by the same amount. Hicks said he hasn’t seen a decline in credit card use in five or six years.
But many consumers are using cash or debit cards because they are being forced to. Laura Nishikawa, an analyst at Innovest Strategic Value Advisors Inc., a New York investment research firm, said that based on data from Visa, Master Card and American Express, the number of credit cards that consumers have fell 5 percent in the second quarter from the first quarter. That was mainly because consumers received fewer credit card offers, she said.
For years, consumers tapped into inflated home equity and used credit cards to finance their spending. Now those spigots are being shut off, and job losses are mounting.
“Consumers are really struggling to find sources of cash to make purchases,” Hoyt said. “The rapid job losses are taking a big bite out of labor incomes. Obviously, it’s making it much more difficult to borrow.”
Online jewelry seller Blue Nile, which reported a 23 percent drop in third-quarter profits earlier this month, noted that deteriorating credit has hurt sales of jewelry priced from $5,000 to $25,000.