The most optimistic forecasts for this year's holiday retail sales start with a two percent increase, with many analysts now predicting a decrease. Yet none of those forecasts adequately factor in the impact of recent credit card practices: enormous upward adjustments in annual percentage rates (APR) and downward adjustments to credit limits for millions and millions of Americans. The impact of these two related practices threatens to turn the holiday into a disaster of unprecedented proportions.
Let's put this into perspective. The National Retail Federation estimates that credit/debit cards account for 40 percent of all holiday retail purchasing. We have no way of knowing what portion of that represents additional borrowing. We can infer that in today's climate, it would be substantial. Already, Walmart is seeing double digit drops in sales by credit cards...in September! Target, one of the few retailers who still own their credit facility, announced that credit terms had to be tightened in response to an estimated 10 percent loss rate on current accounts. What if 20 percent of holiday credit/debit purchases were going to be financed via new consumer debt? And what if that source dried up almost completely? It's possible that a net decrease in holiday spending of close to eight percent or more might result, on top of the existing downward trend. We may be looking down the barrel of a double-digit decrease in holiday retail spending.
And that bleak outlook may be the result of the unanticipated actions of banks, which if taken out of context, might actually be correct short-term business decisions. Credit card providers, including JPMorgan Chase and Citi, have over the last 30 days unilaterally increased the APR on a vast number of consumer accounts, in one case from 8.99 percent to 29.99 percent! Calls to those banks elicited this response: if you decline the new rate, we'll cancel your account.
Can we really criticize banks for taking these steps? If they know that consumers will have great difficulty servicing their existing debt (and these same banks hold mortgages, which indicate this is a fact), then isn't it an appropriate action to limit further borrowing? And if overall risk rates are climbing and expected to climb further, isn't it appropriate to increase "prices" to cover that risk?
BusinessWeek called attention to these trends in an article titled The Next Meltdown: Credit Cards. Yet that article failed to see either the impact these actions have on consumer spending nor the political implications in the context of this month's financial industry bailout. Consumer spending is at a tipping point and could easily withdraw to levels never seen before. The perspective needed here is the greater good. What happens when the average American sees their credit card interest rate double or even triple? What happens when the minimum monthly payment doubles in size just because of the higher interest? What happens when their available credit evaporates? What impact will this have on holiday?
Discussion Question: What impact do you think the tightening of consumer credit will have on holiday retail sales?