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Americans’ credit card debt burden has been shrinking at a record pace over the last year. According to a recent analysis by the Federal Reserve, however, it’s not necessarily because we’ve become better at managing credit cards and other debt. Rather, according to the Fed report, much of last year’s drop in consumer debt, both for mortgages and credit card debt, came from write-offs rather than pay-offs.
For 16 solid months, from the end of 2008 to January of this year, consumer credit card debt has been declining. Between 2008 and 2009 alone, the Federal Reserve reports a drop of over $90 billion dollars in U.S. revolving consumer credit, most of which is outstanding credit card balances. However, the Fed analysis indicates that more than 90 percent of that reduction came from defaults. Last year, banks wrote off over $83 billion in credit card loans alone, a number that puts the steady credit card debt decline of 2009 in a much different light.
The only time cardholders footed the bill was in the first quarter of 2009. After that brief pay-off period, write-offs spiked, hitting an all time 10.1 percent high, on an annualized basis, in the third quarter of last year.
The record credit card defaults are a fall-out from the credit crisis of 2008 and the prolonged economic downturn that followed in its wake. Many Americans have lost their jobs or suffered pay cuts, causing many consumers to rely more on credit cards to make ends meet, as well as making it more difficult for many to meet their monthly credit card payments. It didn’t help that card issuers ramped up credit card interest rates during much of 2009, to offset losses from the increasingly risky credit environment and the reduced income triggered by some of the provisions in the new credit card law. With increased interest rates came higher credit card bills, making it more difficult for cash-strapped consumers to make their credit card payments.
The moribund housing market has also taken its toll. Even though 2009 brought a 1.7 percent decrease—the first ever since 1945—in the total American household debt, a number that includes mortgages as well as credit card balances, defaults still account for the majority of that drop. In the area of mortgage debt alone, investors and banks wrote off an estimated $200 billion last year, accounting for over 4/5ths of the decrease.
There is a silver lining though: even though banks and investors, not consumers, have been the ones clearing out bloated levels of consumer debt, over the long-term the ‘debt destruction’ may help many Americans return to a more secure financial situation, from where they can begin making contributions to economic recovery. Last year, although the average American’s net worth (the value of property and investments less mortgages, credit-card, and other debts) was still low in comparison to that of 2007’s peak, it had still risen a commendable 5.7 percent from 2008’s trench. The broad national consumer“ deleveraging” over the long term could be paving the way for a future of genuine, not subprime debt-funded economic growth.
