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The New Reality About Consumer Spending Habits

Along with banks that are now undergoing increased scrutiny, credit-happy consumers are also finding themselves pushed against the wall as they begin to realize that they need to deal with life without credit. The US economic crisis has forced the credit card industry to rethink its strategy. Since the “revolving credit” concept was introduced in 1958 in the US, the business expanded to become a $1-trillion industry. Between 2005 and 2008, consumer spending using credit has bought the savings rate in the US to nearly zero.

But in May, this trend reversed. The savings rate rose to 6.9 percent, a 15-year high that was boosted in part, by the federal stimulus package. This is just one of the signs that the credit card industry is about to reverse. For the first time in its 40 year history, it is expected that revolving credit will decline.

Credit card companies are tightening credit standards because the default rate has doubled from 2006. Likewise, consumers are hesitant to take on additional debts when their economic future remains uncertain. In many places around the country, the value of real estate properties are still precautious and job security is becoming an increasing concern.

Changing the Consumer’s Spending Behavior

For many, their attitude towards debt has changed. During the housing boom, it seems practical for homeowners to borrow money using their home equity. The new marketplace dynamics changed all that. Even after the US comes out of the recession, spending habits will already be influenced by this dramatic experience.

Over the short term, the consumer’s motivation to save may effectively halt fast recovery because around 70 percent of the US economy relies on consumer spending. Over the long term though, a high savings rate will provide individuals with sufficient capital to invest in new ideas and innovations. It is predicted that this will create jobs and spur economic growth.

In the meantime, there is no escaping the fact that both the credit card companies and the consumers are struggling for balance. Banks are trying to figure out how to establish the credit worthiness of their clients because the FICO score seems less effective in today’s turbulent environment. On the other hand, consumers are adjusting to a “leaner” lifestyle where they need to cut back on almost everything to survive.

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Category: Personal Finance

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