Credit Cards Being Used as Defense vs Inflation in Paycheck-to-Paycheck Economy 

For consumers — at least when it comes to confidence that they can handle mounting credit card debt in the face of inflation and even living paycheck to paycheck: Watch what they do, not what they say.

Faced with consumer prices rising at a clip not seen in 40 years, consumers are increasingly turning to the plastic (OK, the digital cards, too) to meet everyday expenses, to fill in the gaps in purchasing power that occurs when prices rise faster than income.

Presumably, the cash cushions that have been built up through the pandemic have not been enough to prop up spending; though savings have not been exhausted, the paycheck-to-paycheck economy demands that consumers use all the tools at their disposal to make ends meet — and splurge a bit.

Not all that long ago, as recently as 2021, debit spending outpaced credit card spending at a wide clip, where consumers wanted to spend the cash they had on hand, while paying down credit card loans (up until recently, when that debt spiked into the end of 2021). Now the tables have turned a bit, and the pace of spending on credit cards has picked up, eclipsing growth in debit. In part, it may be that consumers have felt relatively healthier about their financial status in recent months; it’s more likely that credit is a defense against inflation.

Earnings results have been rolling in, with marquee names in the banking sector showing that in many cases spending is back at levels not seen since before the pandemic. By the numbers, JPMorgan Chase said that spending, using credit cards as the conduit, was up 29%. And, per commentary on that earnings call, credit quality is strong. Chief Financial Officer Jeremy Barnum said the firm is “continuing to see positive trends” as spending on travel and entertainment has been picking up, surging 64% in the latest quarter.

Read also: JPMorgan Adds $1B+ to Loan Loss Reserves as Economic Threats Mount

Separately, Wells Fargo saw consumer on its own credit cards swell by 33%. Bank of America’s results, released on Monday (April 18) show that credit card spend was up 25%, outpacing debit spending growth of 9%.

Read more: Wells Fargo Posts Declines in Revenue, Home Lending

And to get a sense of just how fast the “round trip” has been, BofA’s own results show that spending on retail in 2021’s first quarter was 37% higher than 2019’s first quarter; spending on food was 25% higher.

Now, part of that growth is due to inflation, which as pretty much everyone knows, is running at rates not seen in four decades. But part of the growth is organic, representing pent-up demand as economies reopen. The question remains as to how long it all can last.

Confidence in the Cards 

PYMNTS’ own data, as seen in the “Digital Economy Payments April 2022 U.S. Edition How Consumers Pay in The Digital World,” show that, for instance, a bit more than 31% of grocery purchases were made using credit cards, up about a percentage point from a year ago.

Read here: New Data Show Consumers Are Buying Less, Spending More and Changing Habits

The confidence in wielding credit cards at the point of sale comes as consumers’ expectations about what lies ahead has been decidedly negative. The University of Michigan’s Consumer Sentiment Index showed a recent reading of 59.4 in March down more than 5% from the previous month.  Inflation, of course, is top of mind. But then again, the wallets keep opening, particularly for travel, where 19% of consumers spent money to get away from it all in March — a record since the monthly study series started in December.

One wonders how long it all might last. Separate PYMNTS research has found that 62% of the population lives paycheck to paycheck, a demographic that now includes half of consumers who make more than $100,000 annually. The cash cushions that have been built up over the past few years may be pressured. For those making $100K but having difficulty meeting expense obligations, average savings stand at a bit more than $11,000. For the paycheck-to-paycheck consumer who makes $50,000 or less, savings stand at $788.

For now, as the big banks are telling us, consumers are content to buy now, and pay it all down later.  But the banks themselves seem to be girding for a rainy day — at some point. JPMorgan, as we’ve reported, increased its loan loss reserves by $902 million, where previously it had been releasing those reserves into earnings. In Bank of America’s latest results, the firm said that it increased its own provisions on its consumer business by $14 million in the quarter. The reserve now stands at $3.1 billion.