Consumers Use Credit to Buy Essentials and Spend More, Data Shows

Although consumer spending dipped slightly last month, not all spending choices are created equally. While some consumers curtail spending by choice, others do it entirely out of necessity.

Distinctions in spending habits become clearer when examining how and when consumers use credit to cover their expenses.

As PYMNTS Intelligence found when researching “Contrasting the Consumer Credit Habits of Choice and Necessary Financers,” generally speaking, there are three types of credit users. When “necessary financers” use credit, more than half the time it’s out of necessity. The second group, “middle financers,” are those for whom only about half of their credit purchases are driven by necessity. When “choice financers,” use credit, less than half the time it’s out of necessity.

Economic pressures often drive these behaviors. For example, necessary financers tend to use cash and debit cards first to keep essential purchases from adding to their credit card debt. They use credit sparingly, reflecting a cautious approach to financial management. In contrast, PYMNTS Intelligence data shows that choice financers spend more and accumulate credit card benefits — such as reward points — along the way. Additionally, this group is more likely to avoid interest charges by paying off monthly balances whenever possible.

Perhaps not surprisingly, necessary financers represent the consumer segment that is most likely to live paycheck to paycheck while also struggling to pay their bills. When necessary financers do choose to use credit, their approach is to avoid risk. Meanwhile, middle financers may also live paycheck to paycheck, but do so more comfortably. Most choice financers, meanwhile, do not live paycheck to paycheck. These latter two segments do not necessarily seek risk, but they typically can manage it if needed.

Necessary financers try to spend within their means, even for essential items. As the figure below illustrates, they are more likely to use debit cards and cash to stay within their budget. In contrast, choice financiers are 83% more likely to use credit cards for essential purchases than necessary financers, suggesting a higher comfort level when leveraging credit for various transactions thanks in part to their expectation to pay off the full balance by the end of the month.

Despite these spending differences, necessary financers maintain similar expenditure levels for essential items, regardless of payment method. For example, they spend $92.64 on groceries with credit cards and $92.87 with debit cards, which suggests that credit cards don’t encourage them to make more expensive essential purchases. Rather, credit cards help them maintain their ability to buy essential items.

In contrast, choice financers use credit cards to a greater extent for discretionary spending, further highlighting their capacity to leverage credit for non-essential purchases.

These varied financial behaviors and budgeting strategies call out the need for businesses and financial institutions (FIs) to customize their offerings according to each segment they hope to target. Businesses and FIs hoping to align their services with consumer preferences and financial lifestyles may want to consider offering incentives that reward necessary financers for staying within their budgets while enabling choice financers to earn rewards for their credit purchases.

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