Consumers are thinking twice about using their credit cards
This article is from http://www.nakedcapitalism.com and it is about American Express credit card.
American Express (AXP) reported 1st quarter earnings after the close Thursday and from the behavior of the stock, you’d think it suggested a major turnaround and economic recovery.
The stock was up 20% on very strong volume. The stock is now up 150% from it’s March 9th low – from $10 to $25.
If our country is suffering from a financial crisis, and most banks are closing down and losing customers, then how comes American Express company is actually making money? Well, in my opinion, I think the company report their first quater income because they wanted to show people that our economy is bouncing back and banks are doing good financially.
But in fact the report clearly shows continuing economic deterioration. Even though earnings beat analyst estimates, the quality of earnings is very low.
Most importantly, the credit card portfolio continues to show massive credit quality deterioration. The charge off rate on the $56.5 billion US Card portfolio leaped to 8.5% and the press release says AXP expects a 200 to 250 basis point increase in the 2nd quarter!
Consumers do not spend as much as before and they now only buy things that are necessary. Many credit card’s interest rates are continually going up and it seems that it will stay that way for awhile.
Further, spending by card members is dropping precipitously. US Card billed business dropped 15% from $114.6 billion to $97.4 billion. Average basic US cardmember spending dropped 15.8% from $2,838 to $2,391 for the quarter. This suggests worldwide consumer spending is in freefall.
Since the usage of credit cards are dropping, credit card companies are desperately approving credit to just about anyone who wants it. For example my 17 years old cousin, currently in high school and jobless, got approved recently for a VISA card limited to $500 access. Credit card companies are doing everything and anything just to bring in customers, they send emails to sign up for cards and keep sending mails to your house for approval. If you keep deleting the emails and ignoring the letters, they just keep on coming, until you join.
Financial crisis not only affect banks, credit card companies, businesses, Wallstreet, etc. but it also affect people’s spending. Consumers are not as big spenders like before. We tend to consume less and learn to adjust to our new spending habits.
April 27th, 2009 at 7:00 pm
Thank you for the blog.
I honestly do not know how credit issuers still get away with it…but as one person said on another blog. It is because consumers still use credit cards.
There is one way out of this-increase wages. Wages have not risen with inflations and so we must pay with credit. And also, another option is making health care more affordable. Becoming a society that offers benefits to all(not just the wealth elite) offers us the chance to consume smartly without going into debt.
Problem, the rich can’t get richer.
Thank you