Living with credit

Seasonal debt cycle can make costs grow

Fred Williams

How does the earth’s angle to the sun affect the rise and fall of credit card bills?

The card has seasons of its own, to paraphrase Jerry Garcia, and understanding the natural cycle of consumer debt could help keep your finances in sync. Card use, repayment, and offers for cards follow regular patterns — and so do missed payments.

“Clearly we do know there is this pattern that takes place with credit card balances,” said Keith Leggett, senior economist with the American Bankers Association.

Balances on consumer revolving debt — mostly made up of credit card debt — begin to bulge in August for back-to-school shopping, based on Federal Reserve figures for the past 10 years. They take a breather in September and October, then start shooting upward in November. But December is when they really hit their stride.

Since 2004, balances rose an average of about 0.8 percent in August, 1 percent in November and 2.5 percent in December.

It’s not surprising that card borrowing ratchets upward during shopping seasons, peaking with the year-end binge of gift-giving, parties and holiday travel. It is a basic job of credit cards to bridge the cash-flow gap during periods of heavier-than-normal spending.

But riding this debt cycle can be costly, with card interest rates averaging about 14 percent — and for some consumers, the expense is unnecessary. Many people “can easily avoid interest charges by doing a little bit better financial management,” Leggett said.

“A lot of times they have money sitting in an account they could use to pay down their credit card — they just don’t think about it.”

That might sound like raiding your rainy-day fund to pay off a credit card splurge. But if you have the discipline to build up your cushion again by saving from your income, consider using the stash to pay off card purchases.With banks paying next to nothing on savings these days, the economic argument is clear.

“In the long run I think you come out ahead because you avoid finance charges, ” Leggett said. “You build the fund back up when you have that seasonal bulge in income.”

Payback time comes in the lean months of January, February and March, when balances shrink back down again. On average, balances shrank 1.2 percent in January, 1.7 percent in February and 1 percent in March. During the in-between months of spring and summer, balances hovered close to the no-change level.

The wintertime repayment cycle gets a boost from the weather, as cold and snow curtail shopping and going out. And there are other seasonal factors at work.

“Right after the end of the year you get bonus checks,” Leggett said — if you are one of the lucky workers compensated this way. “At the same time, tax refunds come in — people use that to pay their debts.” In 2013, 101 million people received federal income tax refunds, according to the U.S. Internal Revenue Service, with the average amount being $2,651.

Even so, paying year-end bills is a strain, the pattern of late payments indicates.

Over the past 10 years, delinquency rates have peaked in the first quarter, according to Federal Reserve figures. The missed payments come even though balances are being paid down at the same time.

“It could be because people are traveling, they just didn’t have time to make payment in a timely fashion,” said Jane Yao, senior vice president of benchmarking and survey research at the ABA. “But you also have those who overspent a little bit during the holiday season.”

The delinquency rate on credit card balances averaged 4.2 percent in the first quarter since 2004, making it the peak time of year for missed payments. Consumer loans overall followed a different pattern, coming in about a percentage point below card delinquencies. As a group, consumer loans have their highest delinquency rate in the fourth quarter, at 3.4 percent. The Fed data excludes home loans, which are tracked separately.

“Not everyone is getting year-end bonuses,” Yao said. And if they do, they know the windfall is coming and spend accordingly — or more so.

Another cycle that affects cards is the business cycle of recession and recovery.

Charting card balances over the past 10 years yields a line shaped like the back of a triceratops. The big bump in the middle is the recession of 2009, when balances fell by $200 billion, and the smaller ridges along the back represent the annual year-end spikes in card debt.

The annual cycle used to be more important for credit card issuers, who would generally flood mailboxes in advance of holiday spending.

Looking back into history — not quite as far as the Cretaceous period, but in the 10 year period ending in 2003 — the seasonal surge in balances was more pronounced. The trend of year-end balance building and winter repayment was the same, but amounts were greater. Balances surged nearly 7 percent on average in December, and January’s payback averaged almost 3 percent.The moderation in those swings in the subsequent 10-year period, from 2004 through 2013, meshes with more cautious consumer habits in the post-recession period.

It may also help explain a change in the pattern of card offers.

“Historically, meaning pre-recession, it was fairly common to see a ramp-up in mailing and other offers leading to the fourth quarter,” said Michael Misasi, research analyst with Mercator Advisory Group.

There was a year-end push for general purpose cards, to get credit into the hands of people about to spend. Then a surge of balance-transfer offers followed that,  in the early months of the new year, as consumers carrying a fresh load of debt sought breaks on interest rates.

“But that pattern has really changed — banks are trying to be more focused with marketing efforts, trying to be more targeted,” Misasi said. Now offers are more often based on analysis of an individual or group’s financial characteristics. Seasonal spending is less pronounced, or at least, less of it shows up on card balances. And people may want a balance transfer option at any time of year, Misasi said, such as for unplanned car repairs or medical expenses.

“I don’t think seasonality is a big factor any more,” he said. “You might see occasional spikes at different points of the year, but that more likely has to do with a major bank launching a new product.”

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