U.S. consumers are switching credit cards for other financing options: JD Power

Although US credit card users are happy with this credit option, they are using it less frequently in favor of other alternatives, according to research by JD Power. (iStock)

Although Americans are happy with their credit card services, financial stress and increased use of alternative financing options mean they rely less on them, according to a recent study.

The JD Power 2022 US Credit Card Satisfaction Study indicates that overall credit card satisfaction improved 5 points to 810 (on a 1,000 point scale) from a year ago. This was measured by the so-called Net Promoter Score.

However, the study indicates 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, compared to 47% in 2021 and 2020 and 50% in 2019.

Instead, consumers’ average monthly cash spending has increased by 49% over the past five years and debit card usage has increased by 80%, according to the study. For larger purchases, 44% of credit card holders said they prefer using alternative financing options like buy now, pay later (BNPL) – which is an interest-free installment plan available from many large retailers – flexible financing/installment loans or personal loans.

John Cabell, director of banking and payments intelligence at JD Power, said the increased use of alternative financing options is a real concern for the credit card industry.

“It will become extremely important for card issuers to improve product value and build proactive support for a growing segment of financially challenged customers as we enter this next phase of the business cycle,” Cabell said. .

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BNPL emerges as a leading alternative, study finds

The study indicates that among consumers using alternative financing options for large purchases, almost 30% chose to use BNPL because of its “reasonable fees and competitive interest rates”. BNPL allows consumers to pay for their purchases in installments and is often interest-free.

Credit cards, on the other hand, have been hit by multiple interest rate hikes. The Federal Reserve has approved five rate hikes this year and is expected to continue raising rates as it seeks to hit a 2% inflation target.

“Credit cards bear interest, and interest rates go up, of course,” said Dan North, senior economist at Allianz Trade. “If you only make the minimum payment on a card, you will continue to accrue interest, which is a waste of money. On the other hand, BNPL programs do not charge interest, which is the biggest advantage they have in relation to credit cards so it can be a very attractive alternative to credit cards.”

North said BNPL offers the benefits of a quick approval process, lower credit score requirement and easier access compared to credit cards.

“But, BNPL plans require you to make fixed payments and there are two downsides there,” he said. “First, you need to 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 may incur a penalty, which is effectively the equivalent of paying interests.”

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Study indicates consumers’ financial health is suffering

The study indicates that the number of credit clients classified as financially unhealthy increased by 4% from last year to 57%.

Additionally, the percentage of consumers who said they were worse off financially in 2022 than the previous year rose to 22%, from 18% in 2021. And 49% of credit card customers said they had revolving debt on their main cards, up 43% in 2021.

Credit card balances increased by $46 billion in the second quarter of 2022, a 13% increase from the same period last year and a 20-year high, according to the Federal Reserve Bank of New York. .

“At the rate at which consumers are taking on credit card debt, it’s not hard to imagine more and more households reaching their credit limits,” said Dr. Andrew Forman, professor at the Frank G. Zarb School of Business at Hofstra University. “Furthermore, with rising interest rates, consumers’ ability to manage the debt they already have will be taxed.

“These consumers will find it increasingly difficult to qualify for extended credit limits, additional credit cards, car loans and other forms of debt,” he continued.

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