That stubbornly high credit card debt

March 10, 2010
fascinating spreadsheet from CardHub breaks that number down by looking at two variables: time, on the one hand, and charge-offs, on the other.

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Total credit-card debt outstanding dropped by $93 billion, or almost 10%, over the course of 2009. Is that cause for celebration, and evidence that U.S. households are finally getting their act together when it comes to deleveraging their personal finances? No. A fascinating spreadsheet from CardHub breaks that number down by looking at two variables: time, on the one hand, and charge-offs, on the other.

It turns out that while total debt outstanding dropped by $93 billion, charge-offs added up to $83 billion — which means that only 10% of the decrease in credit card debt — less than $10 billion — was due to people actually paying down their balances.

What’s more, in the first quarter of 2009 alone, total credit card debt decreased by $64.5 billion, of which only $17.5 billion was charge-offs. If you just look at the period from April through December 2009, the decrease in total credit card debt was a mere $29 billion, while charge-offs added up to $66 billion. Consumers weren’t paying down their credit cards at all: they were racking up billions of dollars in new debt, and defaulting on the old stuff.

But enough numbers, let’s come up with a narrative here. The height of the financial and economic crisis was, in hindsight, the last quarter of 2008 and the first quarter of 2009. There was chaos in the markets, panic in the air, and lots of talk of a “new frugality”: people being embarrassed to be seen shopping even if they had the money. So they spent less, and started paying down their credit cards.

Then two things happened: the panic started wearing off, and unemployment continued to rise. The urgency of paying down debt ebbed, even as spending naturally continued in the face of country-wide layoffs. And as a result, credit card debt continued its natural upward rise.

So what’s necessary to bring U.S. credit card debt down from its current level of almost a trillion dollars? Over much of the past decade, it was naturally kept in check by people converting it into home equity loans — but obviously that’s not happening much any more. (And in general it’s a bad idea to turn a credit card debt into something where you can lose your home if you default.)

One natural prerequisite, I think, is going to be a decline in the unemployment rate — people tend not to pay down their credit card debts when they’re unemployed, and not all of their debts end up getting written off.

But we’re also going to need a change in the national mood, and a rediscovery of the virtues of thrift which seemed resurgent for such a short time. Frankly, that’s not going to happen. And the new credit card rules won’t help: by making it cheaper to have and service credit card debt, they also make it more attractive to do that.

Which leaves one last hope: that America’s biggest banks will unilaterally cut down on their credit card lending, especially now that it’s less profitable for them. That already seems to be happening at big banks like JP Morgan Chase. But it’s far too early to consider it a trend. Partly because the alternative — personal loans — is generally less profitable than even the most legally constrained credit card.


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