The Credit Card Market Evolves, Shedding 8 Million Customers

If you've been following consumer credit, then you know it has been shrinking over the past few years. Revolving credit outstanding, which consists mostly of credit card balances, is down 9% from September 2009 to September 2010. If you go back another year, it's down more than 16%. But this isn't just consumers paying down their debt. Some have stopped using credit cards altogether -- as many as 8 million in the past year, according to credit reporting agency TransUnion. The market is changing rapidly.

So how drastic is the 8 million-consumer decline? It amounts to an incredible 11% drop in credit card users. Now, those who use other forms of payment actually outnumber those who use credit cards 78 million to 62 million, according to TransUnion's data.

This may seem somewhat surprising. As technology improves and cash becomes seemingly obsolete, you might expect credit cards to gain in popularity as a matter of convenience. But less credit card use doesn't necessarily imply that more Americans are turning to cash, though it could. It just means that they aren't using credit cards, in particular. According to Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit:

The vast majority of the consumers who do not possess or have stopped using credit cards continue to have and use other forms of revolving and installment credit, and of course still need to pay for necessities.

There are three reasons that are likely responsible for the growth of this segment of consumers who don't use credit cards. The first is that credit card companies have tightened their underwriting standards. As Congress limited their fees and flexibility, they have stopped providing credit cards to some consumers on the margins who are too risky to be profitable under the new regulatory framework.

Second, the regulation also caused credit card companies to broadly increase their interest rates. That likely angered some cardholders who decided to stop using their credit card to protest the rate hikes. Since many convenience users do not have to rely on a credit card, it's easy to use another form of payment instead.

Finally, some Americans simply don't want to run up credit card balances anymore, so have gone cold turkey. The easiest way to ensure that you don't spend more money than you have is to only use cash. As consumers work to strengthen their personal balance sheets, some are likely finding that the ease of using credit cards has done their finances more harm than good.

Still, TransUnion's report also said that the average credit card balance has actually risen slightly in the last quarter. So it's not quite right to say that Americans have cured their addiction to debt -- just that some are relying less on credit cards. Of course, this makes the business environment that much more difficult for banks to make the cards profitable. And if the population of credit card using Americans continues to decline at such a fast pace, then credit card companies will certainly be in trouble.