2012 and Your Wallet: A Sneak Preview of the Year Ahead
What's in store for the U.S. economy -- and the U.S. credit industry -- as we head into 2012? It all comes down to Europe.
Sure, this might sound like a broken record by now, but as we move into 2012, the record could very well be playing a different tune if Europe hammers out a long-term solution to its problems as opposed to what will happen if the Southern European nations default.
What Happens in Europe Matters Here
Each scenario would spell very different things for the U.S. credit industry – in particular whether we can expect continued economic recovery or a double dip recession, So in forecasting what 2012 holds for your wallet, we must first address the still-precarious European debt crisis.
Fortunately, I don’t foresee much changing in the European Union. Since leaders are likely to seek options that keep each individual country’s head above water without making significant structural changes to the group dynamic or currency, the most likely scenario involves temporary solutions being put in place in order to buy time.
What's Ahead for Credit in 2012
Based on this premise, we can expect continued economic recovery in the United States during 2012, which means a few different things for U.S. consumers and small business owners moving forward:
Increased credit availability. As unemployment and charge-off rates fall, credit card companies and other lenders are seeing profit margins rise. This will lessen the need for underwriting conservatism, meaning consumers will find it easier to obtain loans and lines of credit in the new year.
Higher credit scores. The fact that more and more people are finding jobs indicates that credit scores will also be on the rise. There is a general cause-and-effect relationship between the two things because being able to meet financial obligations equals on-time payments, positive information being consistently relayed to the major credit bureaus, and the systematic devaluation of past credit problems.
More credit card sign-up offers. The recession clearly revealed who the most credit-worthy consumers are (those who didn’t miss a single payment during the tough times) and emphasized the importance of such consumers to credit card companies (fewer charge-offs during a downturn equals more consistent profits). As a result, banks started offering lucrative initial rewards bonuses and 0 percent credit cards to lure people with excellent credit into doing business with them. This tactic has obviously proven successful, so there’s no reason to believe it will be curtailed in 2012.
We will use prepaid cards and credit cards more, debit cards less. Debit cards have become less attractive with the Durbin Amendment-inspired interchange fee cap as well as the resulting elimination of rewards and institution of monthly usage fees by banks looking to recoup billions in lost revenue. Rewards credit cards have become even more attractive, thanks to the aforementioned debit card rewards program cuts. Prepaid debit cards work quite well as fill-ins for checking accounts and debit cards, and their interchange fees were not regulated, which means banks will begin pushing their use with new offers and heightened rewards. Put this all together and you’ve got a restructured payment landscape, in which prepaid cards and credit cards are more prevalent, while debit card use subsides.
Overall, these predictions indicate that the U.S. credit industry is in much better shape than it was just a few years ago. Much of this can be attributed to natural economic forces, but some credit must also be given to the CARD Act, which improved transparency thought the credit industry and revamped consumer rights, alleviating many of the once-common concerns consumers had about using this type of plastic payment.
Given the success of existing legislation, we shouldn’t expect any new credit card laws in 2012, especially with Washington’s attention turning toward the 2012 election. Sorry, I’m not going to make any predictions about who’s going to win that race!
Odysseas Papadimitriou is CEO of Card Hub, a leading online marketplace for finding the best credit cards and repaid cards as well as selling unwanted gift cards.
