That stubbornly high credit card debt

By Felix Salmon
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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What do we expect with 25% real unemployment? I’m willing to bet that at least 50% of American households are living paycheck to paycheck

Posted by STORY-BURN | Report as abusive

What we expect is some amount of frugality in response to economic difficulty, rather than the continued unsustainable expansion of credit. I think you’re almost certainly right that 50% of American households are living paycheck to paycheck. In 2007, median household net worth was $120,000. Given that most people have lost home equity and investment assets since then, there’s not a lot of buffer there, and remember these statistics include a lot of people who are in their 50s and 60s and really ought to have significantly more in retirement savings. 0090408.pdf

Historically this is not aberrational, since historically most people are poor. What is aberrational is the belief of modern people that they can continue to spend even without sufficient income, and the willingness of financial institutions to continue enabling. There are two possible endgames for this, which may be far in the future, since people have predicted them at least since the ’80s: either borrowers and lenders spontaneously develop a sense of prudence, or an even greater economic shock forces people to adjust their behavior to ’30s-style frugality. Given the failure of #1 to materialize and the continued trend of fixing debt problems with more debt, my money would be on #2, but I wouldn’t put money on when it happens since I’ve already expected it my whole life. The best a reasonable person can do is take advantage of cheap leverage to the extent that it’s affordable on their income and asset levels, and avoid the excesses that peers tempt us into.

Posted by najdorf | Report as abusive

Living paycheck to paycheck?? How cozy. How about living credit card to credit card?

Posted by doctorjay317 | Report as abusive

There’s an estimated (American) billion credit cards in the U.S. so the total aggregate debt on those of a trillion dollars averages to a thousand bucks apiece, open. I don’t have any credit card debt, so someone else has mine.

Does it really all come down to individual choices? The way credit card companies keep book, I seriously doubt it. Other forces are at play here.

Since a) there’s not nearly as much you can do with $1k bucks since Y2k and b) it’s getting harder and harder for the average person to earn, better yet collect on, a thousand easy bucks and c) there is less and less sense of common ownership in the American economy by average Americans, I think the thing to do would be to issue everybody with Goldman Sachs Depleted Uranium Cards and let them all run up monumental balances they’re never going to pay off, like millions of little TBTFs. And have done with it. The end result would be a truly stimulated economy, that’s for sure.

Beats the heck out of moaning on about “thrift” which in today’s language is just another word for collective austerity, the gateway drug to total economic enslavement. And where might be the fun in that?

Posted by HBC | Report as abusive

And when the big bank issuers cut back on card lending further we’ll get another whole set of popular press articles about how they are not playing fairly and taking things away from their customers. Because, you know, the right to credit in general, and low-cost unsecured credit in particular, is enshrined in the constitution.

Posted by TRKAdvisors | Report as abusive

Whether you pay down debt or extinguish it via a charge-off, it’s still de-leveraging…

Posted by rolfewinkler | Report as abusive

Go Rolfe !

I don’t know what “charge-off” means, sounds like a WMD or IED, but check the effective annual rates versus APR’s.


As long as banks profit on Fed’s interest turn, the band keeps on playing.

Posted by Ghandiolfini | Report as abusive

In answer to the question raised in the article, “So what’s necessary to bring U.S. credit card debt down?”

I’d say the credit card company interest rates need to be more reasonable. Most states regulate usury fees to fair rates which are much lower percentages than are charged by credit card companies. How do they do it? Well, the credit card companies locate their operations in the few states which allow virtually unregulated usury rates. So, instead of a cap of 12% you can commonly see rates as large as 28%.

Two options exist:

One, regulate the industry better than the recent congress offering, the so called credit-card customers’ “bill of rights.” That piece of legislation didn’t address interest rates. It was a hands-off topic which was limited due to special interest lobbying by the credit industry.

Two, don’t play the credit card game. It is stacked against you. These guys are profoundly demonic in their strategy to suck all of the golden eggs from the goose without killing it. They want the interest. The don’t care if you ever pay off the principle as long as you are a constant source of interest income to them. They are highly skilled in squeezing your income for all it is worth. They will win every time.

Posted by Tom_MacKnight | Report as abusive

The interest rates on credit cards are high for two reasons;

1) The high default rate; and
2) People will pay it.

Frankly I am surprised that credit card debt isn’t higher than it is, but as one of you pointed out, some of it has been converted into home equity loans.

Credit cards are a convenience, too bad more people don’t treat them as such.



Posted by Bloefeld | Report as abusive

The key is to keep manipulating the stock market in order to secure the illusion that banks are solvent and the economy is creating organic demand. The S&P 500 hit a new high today now it’s time to lure John and Jane Q. Public in so there are real bids to hit.

Within the next few years anyone born after 1991 is going to demand that anyone born before 1991 are euthanized in to assure solvency…baby boomers first! Grab Rush Limbaugh before he leaves the country.

Posted by csodak | Report as abusive

We help consumers who have more than $5k in unsecured debt. We guarantee settlements at 55% of your current balance or better. Call or email me for more details.

John Shapiro

Posted by ccdebt00 | Report as abusive

Unfortunately the CardHub data are wrong. They applied the chargeoff rate from the Federal Reserve chargeoff report, which is commercial bank data, to all revolving debt, only a third of which is from commercial banks. See the links below for more details.

Jim Fickett 010/04/consumer-credit-more-than-meets-t he-eye.html id=investment:commentary:2010:05:01-cons umer_credit_and_consumer_spending

Posted by JimFickett | Report as abusive

We should be talking about how to stay out of debt, after we have managed to pay off those debt. most families are deep in debt not becouse of low income, but becouse of the way they spend, we need reeducation.

Posted by Anonymous | Report as abusive