01/19/2012 03:54 pm ET Updated Jan 20, 2012

Bank Of America Sees Huge Growth In New Credit Card Accounts

After being rebuffed in its efforts to charge $5 per month for debit card use, Bank of America is gambling on the optimism of American consumers and growing its credit card business.

On Thursday morning, the bank reported that in the fourth quarter of 2011 new credit card accounts grew by more than 50 percent over the same period in the previous year. Credit card purchase volume -- the total amount customers charged -- increased to $56.1 billion up from $53.8 billion in the fourth quarter of 2010.

Bank of America is merely the highest profile bank to bet big on Americans' willingness to buy on credit. In quarterly earnings reports released in the past week, most of the major banks reported an increase in credit card borrowing at the end of the year. Thursday afternoon, American Express reported that customers increased their credit card use as 2011 drew to a close.

Analysts and banks herald the increase in credit card spending as a sign that American consumers are optimistic about the economy. The question now: Is that optimism justified?

The move back to credit cards marks a swift turnaround from the last several years, when banks pushed customers to use debit cards. Today, people using that cash equivalent are the undesirables of the retail banking world. No one felt that more than millions of Bank of America customers who were told they would be charged a $5 monthly fee for using debit cards last fall. That ploy, had it worked, could have netted the bank hundreds of millions of dollars.

But the shift to credit is denting Americans' savings accounts. In November, the Federal Reserve reported that revolving credit -- made up mostly of credit card debt -- had grown at annualized rate of 8.5 percent, its highest rate in months, while the savings rate dipped to its lowest point since January 2011.

David Sus, director of global analytics for FirstData, one of the largest card processors, said the dollar volume for overall credit card spending increased by 9 percent in 2011 from the previous year. Inflation with gas, food and clothing prices may have driven those with low or middling incomes to spend more on credit. However, year-end increases on credit card use for restaurants and travel reflected stronger consumer confidence. "People are more willing to carry credit debt than in the past," Sus said.

The job market is the primary factor that will determine whether the credit card gamble will be worth it, said Scott Valentin, a research analyst with FBR Capital Markets, a financial research firm.

"If consumers want to keep spending, then they have to use credit to maintain spending growth," said Valentin. That scenario works as long as unemployment numbers continue to decline. If the economic recovery stalls, and unemployment claims surge back up, then credit could become scarcer again for consumers.

Moody's investor services expects the six largest card issuers to grow a combined 6 percent this year, to $517 billion, Dow Jones reported. Those six include three banks -- Bank of America, JPMorgan & Chase, Citigroup -- as well as Capital One Financial Corp., American Express and Discover Financial Services.

On a strictly transactional basis, banks stand to make much more money on credit cards than on debit cards. The fees banks charge merchants for accepting debit cards have been capped since Oct. 1, but credit card fees are still priced as a percentage of the purchase. An $80 purchase with a debit card nets a bank around 24 cents; the same purchase made with a credit card nets between $2 and $4 depending on the type of card used (rewards cards typically have higher swipe rates).

Bank of America reported Thursday that its card division turned a profit of $1 billion in 2011, down from $1.3 billion the year before. The decline reflects losses associated with lower interest rates and regulatory changes, including $430 million loss of income resulting from the implementation of the Durbin Amendement, part of the Dodd-Frank financial overhaul passed in 2010.

"We have now absorbed [regulations]. The focus is now to balance customer and shareholder needs," a spokesman said on the earnings call.

In addition to swipe fees, credit cards make money for banks in several ways, including fees from balance transfers or late payments, interest, and cash advances.

Banks hope that the boom in new card accounts will bolster balance sheets in the quarters to come. Charge-offs, or losses recorded from customers' unpaid balances, are down across the board at the biggest banks. Valentin said that new charge-offs don’t typically show up until two years after the new account is opened.

This article has been updated to include information on American Express customer credit card use that was released after publication.