I read an interesting article this morning on Yahoo! News that pointed to a significant decline in the number of people who are not using credit cards. In fact, currently about 62 million people use credit cards, compared to about 70 million people last year.
Although this decline is attributed in part to increase in debit card usage, which in recent years have surpassed credit cards "in both number of transactions and volume," there are other dynamics at play, and that got me thinking.
One reason for decline in credit card users is that banks are not extending credit to individuals who appear riskier. This is similar to tightening that lenders have been doing with mortgages and other types of loans since the housing market collapsed. We've all heard that even those people with good credit standings, have seen their spending power curtailed as banks look to crisis-proof their assets.
Another reason for decline in credit card usage is change in the mindset of individuals since the recession. For example, recent economic data suggests that the savings rate in the United States is at the highest in decades. This mounting evidence suggests that consumers are being cautious about how they spend their money, and this lack of confidence has negative implications for our economic recovery.
A well-functioning banking system is crucial to our economy, but the importance of consumer confidence is the ultimate determinant for economic recovery. The banks themselves are well-funded and are making profits, but they have no incentive to lend right now because consumers, small businesses, and everyone else have pulled back.
Yes, we can blame the banks all we want, and they are clearly by minimum responsible for the mess we are in, but until consumers feel confident that the economy is on the right track, we have a long time to go before everyone is happy again. Think about it, whether you're optimistic or not, it's impossible to tell what the future holds, and every risk requires a reward.
If you don't know what the reward is for taking a risk, then why would you take the risk?