2013 Credit Card Debt Misleading Unless You Know Why

by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

The three largest sources of household debts are first, mortgage debt; second, student loan debt; and third, credit card debt.

Federal Reserve statistics tell us that as of June 2013, U.S. household average consumer credit card debt is $15,216, averaging only those households that have credit card debt. (If you consider all households, then the average credit card debt is $7,098.) The average mortgage debt is $148,443; and average student loan debt is $32,054.

All totaled, U.S. consumers owe $11.19 trillion in debt, which is 1.5 percent lower than last year, as follows: $849.8 billion in credit card debt; $7.9 trillion in mortgage debt; and $992.7 billion in student loan debt, a 7 percent increase from last year.

The relatively level amount of credit card debt could mean two things: First, if consumers are spending more, they help stimulate the economy, resulting in more jobs and higher incomes. But if wages and employment are sluggish, this could mean that families are using credit cards to pay routine household bills, rather than an increase in consumer confidence.

While the amount of consumer debt is falling overall, this is not due to repayment or consumers working harder at credit card debt elimination; rather it’s due to defaults. So why did the number of defaults increase?

In 2010, credit card issuers wrote off seriously past-due accounts, which reduced the overall revolving credit card debt. In the second quarter of 2010, the charge-off rate rose to 10.9 percent, which was over triple the amount in first quarter 2006, when it was just 3.1 percent. As a result, charge-offs and credit card debt settlements accounted for a large part of the debt reduction.

As the number of charge-offs increased, credit card issuers reduced the number of credit cards they approved and they granted cards only to more creditworthy customers with good credit scores. So the rate of charge-offs appears to be a one-time correction instead of an increase in consumers’ income or financial responsibility.

Today, as the economy slowly improves, we see credit card companies beginning to loosen their standards by allowing more consumers to borrow more money. And, as the economy gets stronger, you can expect household indebtedness to once again increase.

So while we see credit card debt per household decreasing from $16,675 in 2006 to $15,374 in 2012, the primary reason is due to the increased number of charge-offs, which changes the appearance of the banks’ profit and loss statements.