Revolver or Transactor?
Are you a "revolver" or a "transactor"? If you have an active credit card account, you fall into one of those categories. Based on recent data from the American Banker's Association (ABA), you are far more likely to be a revolver than a transactor, and that is good news for the credit card industry.
According to the ABA's Credit Card Market Monitor for the fourth quarter of 2016, revolvers hold 43.7% of all credit card accounts while transactors hold only 29.1%. The remaining 27.2% of accounts have no activity and are considered dormant. That means almost half of all credit card accounts — and 60% of active accounts — carry a balance.
To fully understand transactors and revolvers, consider your credit card account the way credit card companies do — in the context of loaning money.
It's Not The Card, It's How You Use It
If you never charge more than you can pay off at the end of any month, your credit card has the same effect as a short-term, interest-free loan. Transactors follow this path. They pay their bills off every month regardless of how much they charge. Each month's bill is treated as if it were a single loan transaction to be paid in full at month's end, while the next month constitutes a new transaction.
If you regularly carry a balance, your credit card is more like a series of overlapping short-term loans. Balance-carriers are called revolvers because their credit constantly revolves without a "payment-in-full" ending date. Pay down $1,000 of your $3,000 balance, and that $1,000 is immediately available to you for more charges.
The card functions in the same way whether you are a revolver or a transactor — it's the payment patterns that dictate your classification.
Revolvers Welcome, But Be Careful
Credit card companies obviously prefer revolvers, because they receive no interest income from transactors. The average credit card interest rate is near 16% as of this writing, with cards catering to subprime credit averaging over 23% APR.
The average debt per account is close to $1,700, according to information from the New York Federal Reserve, but since consumers often hold more than one credit card, the credit card debt per American is much higher — estimated at over $5,000 by CreditCards.com and Transunion in separate analyses.
A revolver who decides to pay off a $5,000 card over the course of a year at 16% interest would pay an extra $443.80 in interest charges compared to a single end-of-month payment. At 23% APR, interest charges increase to $644. Given continued spending, interest charges can easily snowball to unmanageable levels.
To be the ideal customer from the credit card company point of view, you should have a running balance that stays reasonably below your credit limit, combined with a history of paying your bills on time. You are a predictable source of income without signs that your debt is becoming hard to manage, which would indicate higher risk of non-payment and possibly eventual default. Credit experts advise that you stay under a 30% credit card "utilization rate" to keep your score high. You can check your credit utilization for free with Credit Manager by MoneyTips.
Other statistics from the ABA report suggest that credit card companies are currently operating in this relative "sweet spot". Monthly purchase volumes are increasing, but are doing so at a lower rate with subprime accounts than prime and super-prime accounts — thus, those who can't afford to spend as much are holding their increases down. Credit card balances as a share of disposable income have been relatively flat for over four years. Both statistics suggest decent credit management.
However, there are areas of concern for both credit card issuers and customers. The ABA report shows increasing finance yields, not only from more revolving accounts but also from increased interest rates. Given recent news that bank card defaults in the U.S. have hit the highest levels in four years, this suggests that revolvers at the higher end of the debt scale will have an increasingly hard time avoiding debt spirals as rates continue to increase. Similarly, revolvers in general must spend less just to hold their debt constant due to increased interest charges.
Generally, you should strive to be a transactor rather than a revolver. There's no reason for you to pay any interest charges when you can pay off a credit card bill in full each month. Explains Greg McBride, Chief Financial Analyst at Bankrate.com, "I think the worst misconception people have, particularly as it pertains to credit, is this idea that you have to owe money in order to build your credit rating. And that's not true. You can build your credit score very effectively by opening up credit cards and then paying the balance in full at the end of the month. You do not need to carry a balance – particularly at a high interest rate – in order to build your credit rating." You can see your credit score and credit report for free with Credit Manager by MoneyTips.
When you never carry a balance, interest rates are irrelevant. You can focus on cards that provide the highest rewards or best perks. If you want more credit, check out MoneyTips' list of credit card offers.
If you are a revolver, it's very important that you manage your debts to minimize the amount of interest charges that you pay and avoid debt spirals. At the minimum, you should address higher-interest-rate debt first. The free Debt Optimizer tool can help you find your best repayment strategy and reduce interest payments.
Long-term, budgets and spending control are the keys to becoming a transactor. Once you achieve a monthly surplus, you can consider consolidating your debt with a balance transfer card and use an introductory 0% APR period to pay down your balance interest-free.
Credit card companies may not appreciate your efforts, but your wallet certainly will.
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.