Are Consumers Really Paying Down Their Credit Card Debt Balances?

In September 30, 2010
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Just a short post for September, on the subject of consumer credit card debt as reported in the mainstream news media. In next month’s column, I will write more about recent developments in the debt settlement industry in the wake of the recent FTC ruling.

During the financial crisis of 2008-2010, there was a steady flow of articles reporting that American consumers had suddenly discovered frugality, reduced household spending, started paying down debts, and increasing savings. For example, a recent article titled “Consumers Continue to Pay Down Debt,” stated that consumers were “digging out from underneath their mountain of debt.”

As I have read these rose-tinged headlines over the past year or more, I have scratched my head in wonder. That is surely NOT what I have been seeing out here in the field! From my perspective, consumers are not paying off their balances, at least not the folks I’m talking to. Instead, they have been forced to default on their accounts in large numbers due to their own personal financial crises. Millions of Americans have underwater mortgages, or have lost their jobs in the recession. So these headlines and stories claiming that “consumers are paying off their debts” always seemed wrong to my ears.

It turns out that my instincts were correct. We are finally seeing some published numbers that expose the truth behind the scenes, and a major article on this subject recently appeared in the New York Times. According to a recent study by CardHub.com, credit card debt for the second quarter of 2010 decreased by around $12 billion compared with the previous quarter. But charge-offs by the major banks were $21.8 billion during that same timeframe. Since the drop in outstanding debt is *smaller* than the amount that was written off, this means that consumers actually ADDED $9.8 billion of debt during that period. Consumers are not “paying off their debts,” they are DEFAULTING on their debts in record numbers. It’s the exact opposite of what many have been reporting in the financial media. The “deleveraging of the consumer” that we keep reading about is just a mirage, a combination of sky-high default rates combined with the aggressive lowering of open credit limits by the major banks.

In the NYT article, one specific number really jumped out at me – the figure of $832.2 billion for total credit card debt. At the peak of the madness in 2008, we were at approximately $957 billion of credit card debt. So over the past two years, the banks have written off $125 billion, give or take a few billion. That’s a lot of bones, but what startled me is that American consumers *still* owe more than $800 billion on their credit cards! When I recorded the first version of my seminar in 2004, that figure stood at $735 billion, and I was already talking with alarm about “The Great American Debt Explosion.” So have we really made that much progress? Yes and no. Obviously, we’re in better shape with the current $832 billion figure than the previous $957 billion total. But it’s quite clear that a massive amount of consumer debt is sitting out there yet to be resolved. With more than $800 billion of debt still remaining, I predict that debt settlement will remain a viable option for years to come for consumers otherwise facing Chapter 13 bankruptcy.

 

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