Although Americans are happy with their credit card services, financial stress and the increased use of alternative financing options means they are relying on them less, a recent study said.
The J.D. Power 2022 U.S. Credit Card Satisfaction study said that overall satisfaction with credit cards improved by 5 points to 810 (on a 1,000-point scale) compared to last year. This was measured by the so-called Net Promoter Score.
However, the study said that despite an improvement in satisfaction, consumers are spending less with credit cards. So far this year, customers have used credit cards for 42% of their monthly spending, down from 47% in both 2021 and 2020 and 50% in 2019.
Instead, consumers’ average monthly cash spending increased by 49% over the last five years and debit card use increased by 80%, the study said. For larger purchases, 44% of people with credit cards said they preferred to use alternative financing options like buy now, pay later (BNPL) — which is an interest-free installment payment plan available at many major retailers—flexible financing/installment loans or personal loans.
John Cabell, director of banking and payments intelligence at J.D. Power, said that the increased use of alternative financing options is a real concern for the credit card industry.
“It is going to become critically important for card issuers to improve product value and boost proactive support for a growing segment of financially stressed customers as we move into this next phase of the economic cycle,” Cabell said.
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BNPL emerges as a top alternative, study says
The study said that among consumers using alternative financing options for big purchases, nearly 30% opted to use BNPL because of its “reasonable fees and competitive interest rates.” BNPL allows consumers to pay off purchases in installments and is often interest-free.
Credit cards, by contrast, have been impacted by multiple interest rate increases. The Federal Reserve has approved five rate hikes this year and is expected to continue raising rates as it looks to achieve a 2% inflation target.
“Credit cards carry interest, and interest rates are, of course, rising,” Dan North, senior economist at Allianz Trade, said. “If you only make the minimum payment on a card, you will still be accruing interest which is a waste of money. By contrast, BNPL programs do not charge interest, which is the biggest single advantage they have over credit cards so that it can be a very attractive alternative to credit cards.”
North said that BNPL offers the advantages of a quick approval process, a lower credit score requirement and easier access relative to credit cards.
“But, BNPL plans do require you to make fixed payments and there are two disadvantages there,” he said. “First, you must have the ability to make those fixed payments, so it requires careful cash flow planning, and second if you don’t make the payment, you can incur a penalty, which is effectively the same as paying interest.”
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Study says consumer financial health is suffering
The study said that the number of credit customers classified as financially unhealthy increased by 4% since last year to 57%.
Additionally, the percentage of consumers who said they are worse off financially in 2022 than the year before rose to 22%, up from 18% in 2021. And 49% of credit card customers said they are carrying revolving debt on their primary cards, up from 43% in 2021.
Credit card balances increased by $46 billion in the second quarter of 2022, a 13% increase from the same time last year and a 20-year high, according to the Federal Reserve Bank of New York.
“At the rate at which consumers are incurring credit card debt, it is not hard to imagine more and more households reaching their credit limits,” Dr. Andrew Forman, a professor at Hofstra University’s Frank G. Zarb School of Business, said. “Further, with rising interest rates, the ability of consumers to handle the debt they have already incurred will be taxed.
“These consumers will find it increasingly difficult to qualify for expanded credit limits, additional credit cards, car loans, and other forms of debt,” he continued.
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