Shoppers Give Their Fear of Debt a Holiday : Consumers: Credit card purchases are up sharply as Christmas nears. At least some of it is due to a flood of issuer incentives.

Encouraged by an unprecedented barrage of enticements from credit card issuers, consumers are using plastic at a sharply higher pace this holiday season, a hopeful sign that many months of belt-tightening may be ending.

Since the holiday shopping season got underway Thanksgiving weekend, Visa U.S.A and Mastercard International have registered their strongest volume gains since the late 1980s.

Although the surge in credit card borrowing appears to be slower in Southern California, it could provide a badly needed spark for the nation’s economic recovery, because one-fifth of consumer spending is done with credit cards. And consumer spending accounts for two-thirds of the nation’s economic activity.

The burst of borrowing comes after two years of steady debt reduction, indicating that consumers are no longer so squeamish about taking on new debt. Although this may be bad for consumers who are overextended, fewer are in that position than a year ago as delinquencies are down, credit card firms said.

While retail sales are up an estimated 6% to 8% this holiday season over last year, charge volume appears to have increased by more than twice that percentage. Visa U.S.A., the nation’s largest credit card association, said its charge volume is up 16.5% since Thanksgiving. Mastercard, the No. 2 card, said its volume was up 17.6% in November.

Charge volume in 1991 grew by a measly 5% over 1990, a dramatic slowdown from the double-digit gains of the 1980s. Industry analysts said the time between Thanksgiving and Christmas accounts for about 30% of all retail charge purchases.

But economists said it is too early to say whether consumers will continue to spend into the new year.

At least some of the borrowing increase is driven by an unprecedented number of discounts, prizes and other goodies designed to get consumers to buy on credit--enticements that will disappear after the holidays.

Visa U.S.A. is awarding one all-expenses-paid “dream vacation” each day until Christmas Eve.

Mastercard users get instant discounts at Kmart, Kay-Bee Toys, Circuit City and 40 other stores.

Wells Fargo Bank is offering its cardholders a discount on purchases at the Broadway and other Carter Hawley Hale department stores.

Fleet Financial Group slashed the rate on its card for the holiday shopping season, and Chase Manhattan is doubling “bonus dollars” that consumers exchange for discounts at Sharper Image and other retailers.

Another chunk of the spending, economists said, is related to the devastation caused by Hurricane Andrew. First National Bank of Chicago economist Diane Swonk said that as South Florida rebuilds, consumers there are running up huge credit card tabs that will eventually be repaid as insurance checks arrive. Noting that sales of washing machines, dryers and other big-ticket appliances have increased by half in South Florida, Swonk noted: “That’s not Christmas shopping.”

But economists say they also detect an underlying optimism that is likely to extend beyond the holidays. The Federal Reserve reported recently that consumer debt rose in September and October, long before department stores decked their halls with boughs of holly. Asked recently to rate their economic well-being, nine of 10 Chase Manhattan Bank credit cardholders said their situation was improving.

Thanks to debt reduction, consumers are in better financial shape today than they were three years ago. The Fed has declared that, thanks in part to lower interest rates, consumers are devoting a smaller portion of their wages to debt payments.

As the holiday shopping season got underway, Mastercard found that only two-thirds of its cardholders carried outstanding balances, the smallest percentage in three years.

But economists say good feeling alone is not enough to spur the pace of the nation’s recovery. UCLA economist David Hensley said consumer spending is likely to lose momentum if not quickly followed by employment growth and income gains. While there are tentative signs that employers are beginning to hire again, the outlook for wage and job growth is uncertain, he said.

And not every region of the country is participating in the credit-spending boom equally. One glaring example is Southern California, where continuing aerospace layoffs and declining real estate values are causing consumers to hold back. California now leads the nation in credit card delinquencies, according to SMR Research of Budd Lake, N.J.

California isn’t likely to begin its economic recovery before mid-1993, and perhaps later, Hensley said. He predicted that holiday spending in the Golden State this season will be down from 1991.

While borrowing more, consumers are still showing self-restraint, analysts and economists said. Visa said the types of transactions being charged on its cards indicate that consumers are bargain-hunting. When surveyed recently, Chase Manhattan cardholders said they planned to pay off their holiday balances within six months. And a Mastercard survey found that more than half the shoppers in the West expected to spend $400 or less on Christmas gifts.

Take Carlos Kattan, a 32-year-old welder in Los Angeles. After steadily reducing his debt throughout the year, he is spending carefully. Shopping at the Glendale Galleria recently, he chose gifts for his family, including a Sesame Street doctor’s kit for his 3-year-old son.

His spending motto: “If you watch your budget, Christmas is not much different from the rest of the year.”

For consumers planning to use their credit cards and pay off the balances quickly, the recent spate of incentives may end up saving them money, said Robert B. McKinley, an analyst with Ram Research in Frederick, Md. In Christmases past, card issuers hyped such extras as “purchase protection” for lost or stolen merchandise. This year, the issuers offer more tangible benefits that deliver “value to people who use the cards,” McKinley said.

But consumer advocates say the blizzard of discounts and special financing offers might blind consumers to the real cost of borrowing.

“It doesn’t make sense to save $10 and then pay 21% interest on the balance,” said Paul Richard, vice president of the National Center for Financial Education, a nonprofit group in San Diego.

Richard said the special deals may tempt people already swamped with debt to take on even more. This may be especially true in California, where the difficult economy is straining finances in thousands of households.

One person who is resisting the temptation to use credit cards is Alba Duarte, a part-time medical secretary in Los Angeles. Shopping with her 4-year-old daughter in Glendale recently, she said she plans to use cash so she can stick to her $500 gift budget. “With credit cards, it is harder to control your spending,” she said.

Credit Tips

Here are some tips to help avoid overspending with credit cards during the holidays.

Stick to your budget: Decide before you shop how much you will spend on Christmas gifts, and don’t use credit cards to go over your preset spending limit.

Develop a repayment plan: Borrow only as much as you can easily repay over a period of time that seems reasonable, ideally within three to six months.

Evaluate the deal: Is the offer really saving you money? Deferred-payment deals commonly allow interest charges to accrue during the deferral period, an arrangement that buys you time but may end up costing you more. “O% interest” deals save interest costs only if the balance is paid off within a certain time. If the balance isn’t paid, interest is assessed retroactively from the date of purchase.

Keep a perspective: Paul Richard, vice president of the National Center for Financial Education, said loved ones don’t expect you to give until it hurts. “Your family and friends don’t want you to go into debt to get them Christmas presents,” he said.