Buy now, pay later losing appeal for U.S. consumers

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - By choice or by force, more U.S. consumers are putting away their credit cards as the financial crisis reshapes attitudes toward spending and debt.

Wal-Mart Stores Inc noticed that customers were pulling out the plastic less and less this year as the financial turmoil intensified. The world's biggest retailer said the portion of transactions using credit cards was falling after three consecutive years of double-digit gains.

"Customers have maxed out on their credit limits," Eduardo Castro-Wright, the head of Wal-Mart's U.S. stores, said at a recent conference. "They can't use (credit cards) more."

A survey on U.S. holiday shopping intentions, conducted for Reuters by America's Research Group, found that 60 percent of shoppers plan to use credit cards less this year to buy gifts. Some of that reflects efforts by banks to clamp down on credit lines, but it is also a symptom of rising anxiety among consumers worried about how to survive a recession.

By definition, credit lets consumers smooth out their spending by borrowing against future income. When confidence is running high, appetite for debt increases, and when the mood turns pessimistic, demand for credit dives.

The latest borrowing binge was likely exaggerated because it coincided with the housing bubble. Rising real estate values fostered a sense of economic security that is now deflating faster than home prices.

BACK TO BASICS

"The consumer has completely lost confidence in the future," said Richard Hastings, consumer strategist at Global Hunter Securities LLC. "They don't want to make long-term financial commitments."

First, consumers cut spending on homes, which usually come with a 30-year commitment otherwise known as a mortgage. Then came cars, typically financed over five years or so.

Now the pullback is spreading to all but essential goods.

In October, for instance, U.S. retailers' sales fell a record 2.8 percent to a seasonally adjusted $363.7 billion -- the largest drop since this series began in 1992, the Commerce Department said. In comparison, September's U.S. retail sales slipped a revised 1.3 percent.

That's ominous for the economy at home and abroad. The American consumer's spending accounts for two-thirds of U.S. economic growth and has been one of the most reliable engines of world growth for the past decade. So when the U.S. consumer puts the wallet away, it reverberates around the world.

Not only are American retailers hurting, but U.S. data released on Thursday showed that both imports and exports fell sharply in September. The World Bank thinks global trade will drop next year for the first time since 1982.

A MOUNTAIN OF DEBT

U.S. households have accumulated an additional $8 trillion in debt since 1998, bringing the grand total to $14 trillion, according to the most recent figures from the U.S. Federal Reserve. As banks grow wary of extending more credit, that may prove to be the high-water mark for many years to come.