More Consumers Using Credit Cards to Finance Big Purchases
Americans are increasingly using their credit cards rather than tapping home-equity lines of credit to pay debts or finance a big purchase.
According to new research from Sanford C. Bernstein & Co., more consumers are now utilizing their credit cards to pay for large debts, rather than taking advantage of their home equity lines of credit. The research firm estimates that credit card loan balances will reach $923 billion this year, surpassing home equity loans by the largest margin since 1990.
“A reversal is well underway as banks have tightened terms and standards, and home values in many areas have yet to fully recover. Revolving credit should continue to outpace home-equity growth for the foreseeable future,” Kevin St. Pierre, an analyst at Bernstein, told Bloomberg.
Perhaps it is no surprise then that Discover decided to close its mortgage sector at the end of July in favor of more profitable banking opportunities. Much of this is the result of record-low interest rates for mortgage loans, which have drastically reduced the profit margins for lenders. The average credit card interest rate is nearly three times higher than the average home equity interest rate, making that sector more profitable.
Bernstein projects credit card loans will continue to grow at a rate of 6% over the next five years.