A Steady Credit Card Use Expected Despite Looming Consumer Spending Cutbacks

Consumer spending is expected to dip in 2013 owing to increased payroll taxes however, analysts say that consumers will continue to show increase credit cards use despite these spending cutbacks challenges. Middle class Americans will not escape higher taxes in spite of the Congress’s effort in passing legislation that helps keep the broader middle class income taxes from going up. The reality is that workers will still part with more than 2 percent through payroll taxes.

The reason behind this is that the government had put a temporary hold in paying payroll taxes of 6.2 percent but this has already expired. In 2011, the government temporarily lowered payroll tax rate to a low of 4.2 percent from the designated rate of 6.2 percent and this hold expired in 2013. What this means is that the workers will have to pay more in payroll taxes and this has an implication on consumer spending.

In yet another blow to consumers, in January 2013, credit card users would be subjected to direct surcharges when they shop in stores. Store owners in most of the states were allowed to impose direct surcharges on shoppers to the tune of 4 percent of the bills they paid through their credit cards. This would further implicate negatively on their spending patterns.

What this means is that consumers need to prepare for tough times ahead whenever they use their credit cards. Bearing in mind that credit card debt is the number one debt burden in the country, it means that consumers need to be careful in the way they spend their income. As though not enough, consumers are likely to be dealt a blow by the seemingly increasing credit card interest rates.

In 2012, MBNA hiked its credit card interest rates up by 4 percent and in a similar move, the Bank of Ireland also extended interest hikes to its card users by the same margin at the end of the year in 2012. The latest move to see increased interest rate on credit card balances has been witnessed within Danske Bank, which has hiked the rates by about 2 percent.

Experts say that other banks are likely to follow suit and increase their rates too. Consumers have been enjoying low interest rates on credit card since the highs of 14 percent imposed in 2010 following the credit crisis. When all these factors are put together, it is expected that consumer spending may be hit hard and banks may have to cope with hard time too. 

However, notwithstanding fear of weak consumer spending, credit card use is still strong and it is expected to grow throughout the year. When consumers do not have sufficient income, they tend to use their credit cards. Owing to the pressures put on the consumer by payroll tax, then these consumers are likely to increase the level of use of credit cards in order to make up for the reduced income, FBR Capital Markets’ analyst Scott Valentin said.

It is also projected that banks that depend on revenues generated through credit card interest rates are likely to experienced reduced earnings because consumers are now holding less credit. There has been a notable decrease in credit card loans and this is something that has seen revenues generated from credit card interest rates shrink significantly.

Companies that count on interest rates levied on revolving loans are likely to feel the pinch. Nonetheless, for American Express, the largest US credit card issuer, it may be less affected by the reduced card borrowing, and this is because this company generates much of the revenue through merchants who are charged when consumers make purchases using their cards. American Express doesn’t rely on revenue generated from revolving credit card loans interest rates.