Credit Cards: Not Dead Yet

Dan Gross has a piece in Slate entitled "The Death of the Credit Card Economy". It tells a plausible and compelling story: as credit-card companies slash credit lines, so are consumers cutting back on their spending.

Gross quotes Dan Ariely as saying that "if it's more difficult to get credit, it might make people feel more pain of paying and therefore spend less" -- and there's no doubt that it is now more difficult to get credit.

But the actual evidence for this "pain of paying" is hard to come by. Reports Gross:

The tightening of credit is forcing more people to confront these uncomfortable choices. In the second quarter, credit giant MasterCard reported that the gross dollar volume, or GDV, of credit charges processed in the United States rose just 0.7 percent from 2007, while the GDV of debit charges rose 15.8 percent.

Gross could easily have used those figures to make exactly the opposite case:

So far, there's little evidence that people are spending less money on their credit cards, or that they're reluctant to pay for goods directly out of their bank accounts. Despite credit lines tightening up, the gross dollar volume (GDV) of credit card charges in the US, as reported by MasterCard, actually rose by 0.7% in the second quarter of 2008. Meanwhile, consumers are going on a rampage with their debit cards, with GDV there soaring by almost 16% year-on-year.

The truth is surely somewhere in the middle. Once you strip out gasoline sales from that credit-card GDV, the number will surely turn negative, even before accounting for population growth and other consumer-price inflation. But the willingness of people to move spending onto their debit cards from their credit cards does make it seem as though Gross's theory has yet to be proven in practice.

I'm also not a fan of switching statistical horses midstream, as here:

In 2007, according to the National Association of Realtors, 45 percent of first-time homebuyers put no money down, and the median first-time homebuyer financed a massive 98 percent of the purchase. But no-money-down mortgages, like Rudy Giuliani's presidential candidacy, began fading in late 2007 and largely disappeared in the cruel winter of 2008. No wonder existing home sales fell 13.2 percent in July from last year while new home sales plummeted 35.3 percent.

The first two statistics -- about downpayments -- refer to first-time homebuyers. The second two statistics -- about home sales -- refer to all homebuyers. In order to make sense of these figures, we really need to know what's happened to the proportion of home sales to first-time buyers over the past year. Alternatively, give us the home-sales figures for first-time buyers, or the downpayment figures for homebuyers in aggregate. As it is, this kind of writing risks sounding like a politician massaging figures to his own ends.

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