TRACEY MILLS
Record delinquency rates

As the biggest shopping day of the year approaches, economists and banking industry analysts are scrambling to predict how – and how much – consumers will spend this holiday season. For the retail industry, it is a make-or-break season; for the banking industry, it’s the best opportunity to monitor current spending and credit trends.

At the American Bankers Association, industry experts are warning banks that consumer debt is rising, but local Bay State bankers say consumer credit quality is not an overly concerning issue this year.

“We are coming off of a record in delinquency rates for consumer credit,” said Tracey Mills, spokeswoman at the ABA. “Consumers are coming into the holiday season with more trouble paying off their debts … banks need to be aware and prepare for this, and have the expectation that this will continue.”

According to the ABA, last year, 51 percent of consumers completely avoided the holiday credit hangover by not using credit cards over the holiday season. Specifically, 39 percent surveyed didn’t use credit cards and 12 percent said they do not own a credit card.

Of those who used plastic for holiday purchases last year, 70 percent paid off their holiday credit card debt by the end of February 2003. An additional 8 percent planned to pay off the debt by the end of March. Twenty-two percent said they were planning to pay off the debt “sometime in the future.”

Mills said that although it’s not expected that consumers will “shop ’til they drop” this season, an ABA study showed that consumers are expected to spend more cash and tap into more credit this Friday than any other single day. The day after Thanksgiving traditionally is the nation’s biggest shopping day, and often gives a glimpse of what to expect for holiday spending overall.

“Consumers aren’t taking as long as previously thought to pay off holiday debt, but this year consumers are expected to spend more than they did last year,” said Mills. “Our last consumer payment study indicated that cash is still king, but we’re wondering if debit cards have surpassed cash.”

Economic ‘Catalyst’

Local bank economists and analysts watch retail spending reports and sales forecasts to predict loan volume and consumer credit lending volume for the holiday season.

Officials at the Massachusetts Bankers Association say that an increase in consumer spending will benefit many local industries, including banking.

“Obviously, if we see an uptick in consumer spending, it will benefit the economy as a whole and many individual industries, including banking. Consumer spending has a way of creating more consumer confidence in the marketplace and that translates in the banking industry into a certain amount of profitability over the long term,” said Bruce Spitzer, director of communications at the MBA. “We would hope for our industry, and others, that we do see some more spending that could act as a catalyst into the year ahead. At the same time, we want to urge consumers to practice self-control in terms of debt.”

Dick Ehst, executive vice president and managing director of corporate communications for Sovereign Bank, says the bank compares results from a number of different indexes and reports to gauge the holiday spending activity of bank customers and how it will affect bank business.

“We look at about eight or nine different retail sales forecast and consumer confidence indexes and retail index reports. We evaluate the Ernst & Young LLP, holiday sales forecast and we look at the holiday watch survey of retail analysts,” said Ehst. “Overall, we have a pretty comprehensive overview for the holiday period.”

Sovereign officials have increased optimism for this year’s spending activity and Ehst said he believes increased consumer spending activity will help boost an economic recovery.

“By and large, there is no doubt that retail sales are going to be much improved from previous years. 2001 and 2002 were the worst years since 1970 [in terms of consumer retail spending], but the entire retail sector is going to see improvement – it’s only a matter of degree of which of those sectors is going to be better than the other,” said Ehst. “The general consensus is that holiday sales will increase in the 6 to 7 percent range. When you look at all of these sales, we have had absolutely a banner year in consumer lending and we’re 18 to 19 percent over our goals. The quality of consumer lending volume has remained high and all we can anticipate is further expansion.”

But if a consumer can’t repay the bank loan, the bank loses the money, so as with every holiday season, local banks and consumer credit agencies are sending out consumer alerts and tips for safe and responsible spending practices this holiday season.

Mel Stiller, chief executive officer of Consumer Credit Counseling Services of Southern New England, said this is the busiest time of year for credit counseling services.

“This is the time of year where we send out advisories and press releases urging consumers to spend intelligently. Obviously, a fair number of people do not, but it’s a combination of holiday spending, a hard heating month and a lot of other things that hit consumers,” said Stiller. “Part of our advice is that people only charge on their credit cards what they can pay when the bill comes in. Think ahead to the 2004 holidays … put that money aside each month and budget. This enables [consumers] to end up the holiday season debt-free.”

Still, bankers remain optimistic for this year’s spending activity, saying consumer confidence will boost the retail marketplace and the economy in general, and local bankers, at least, do not anticipate an increase in consumer repayment problems.

Ehst said Sovereign has not seen an increase in the level of delinquent loans and predicts a very successful 2004 for the bank.

“We’re not seeing the credit-quality issue on the consumer side. I think the overriding driver … is the increase in consumer confidence that has been on the rise since March of this year. We continue to, on a much broader scale, look at the market changes that are taking place but are mindful that the consumer drives two-thirds of this economy,” said Ehst. “What we would anticipate in 2004 is that at some point there will be an uptick in interest rates in general. That’s simply a reflection of the demand for credit vs. the supply of money.”

While the ABA is predicting some consumer debt issues following what some call “Black Friday,” the official start of the holiday shopping season which falls this week, the ABA’s consumer holiday spending survey did not lead analysts to believe that consumers will come out of the retail stores with black marks on credit reports.

Following the ABA’s survey of 1,000 consumers that was conducted March 25, when last year’s holiday bills and debts were still fresh in consumers’ minds, the ABA created a tip sheet for consumers heading into this holiday shopping season which suggests consumers spend within their means and plan a holiday budget to which they can adhere.

Bankers say anyone who falls deep in debt and is unable to pay should inform creditors immediately and banks and other lenders are often willing to help extend payment periods, consolidate debts or assist in refinancing.

According to Mills, bankers who work with consumers during the holiday period are more likely to secure long-term consumer relationships that will benefit the bank.

“We try and encourage consumers to call their bank when they are having a problem and banks can encourage call center and staff to prepare what to say when a consumer calls in with a debt issue,” says Mills. “If a consumer calls the bank early on, before the problem becomes out of control, it will solidify their relationship with the bank. The bank values that relationship and helps get consumers back on track and that builds loyalty to the bank.”