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Can Low Credit Card Balances Save Holiday Spending? Don’t Bet On It

Here’s the scenario. Consumers have cut back on travel, in-person entertainment and restaurant spend. They have paid down their credit cards. Then they will use this newfound spending power to bring a new, vengeful spending strategy to the holiday season because, after all, the American consumer deserves a few gifts after all that they’ve been through this year.

Makes sense. But don’t bet on it.

Several studies have validated various spending trends that could make this scenario tenable. Corporate earnings statements prove them out as well. The main one centers on the drop in credit card spend. A new report from TransUnion shows that average consumer-level credit card balances have declined during the course of the COVID-19 pandemic and now stand at $5,075 as of Q3 2020, down from $5,668 in Q3 2019. Additionally, total card balances fell to $723 billion, a decline of more than 10 percent year over year and the lowest since Q2 2017.

“Credit card balances have been severely impacted by the COVID-19 pandemic as consumers have slowed purchases, especially on travel and entertainment. With fewer people using their credit cards to buy airline tickets or spend money on vacations, it’s understandable to see such a precipitous drop in balances,” said Paul Siegfried, senior vice president and credit card business leader at TransUnion, in a statement. “At the same time, we’ve observed consumers using their credit cards to spend more on home-related purchases. There is also a belief that with the immense slowdown in balance growth during the last few quarters, we may see increased credit usage this fourth quarter as some consumers may be positioned to make more purchases this holiday season.”

In October, PYMNTS reported that Americans had been cutting their credit card balances for the sixth straight month. Revolving debt was down $9.4 billion in August compared with July, the lowest level since 2017.

“The recent declines in total credit card balances reverse a three-year trend between the third quarters of 2017-2019,” said TransUnion. “During those years, consumers consistently increased the balances of their private label and general-purpose credit cards in the quarters preceding the holiday shopping season; balance increases continued during the fourth-quarter holiday shopping season. In the 2019 holiday shopping season, consumers added $40.4 billion in bankcard balances — an increase of nearly 27 percent from the 2018 season.”

As stated earlier, though, don’t bet on this year too heavily. Consumer sentiment is about to get bashed by the latest surge in the pandemic. Too many Americans live paycheck-to-paycheck to bet with any surety on the holiday season. PYMNTS research bears this out, but before digging into that, even TransUnion’s research casts doubt on the likelihood of low credit card balances leading to high holiday spending. A TransUnion financial hardship survey in late October found that more than half of Americans (54 percent) said the pandemic had financially impacted them. Of those persons, half said they expect to decrease retail spending in the next three months and nearly six in 10 (59 percent) will do less discretionary spending.

This is consistent with PYMNTS research, which shows that while consumers will spend less overall, they are going to spend more time online and don’t want to touch anything in the process.

PYMNTS data shows that all three dynamics will become solid planning factors as the holiday season ramps up. Perhaps the data points that are the most contentious center around overall spend. Some forecasts put total retail spending slightly ahead of last year. However, PYMNTS data, which directly addressed intent to spend, shows that only 18.7 percent of consumers will spend more than they did in 2019. Consumers who said they would spend “about the same” accounted for 47.3 percent of responses. The survey showed that 17.8 percent would spend somewhat less, and 9.4 percent would spend much less this year. In a surprising twist, 6.8 percent said they wouldn’t be shopping during the holiday season at all.

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