After reaching a high of $975 billion in late-2008, recent figures released by the Federal Reserve indicate that credit card debt in the US has fallen to it’s lowest level since 2004. But how has this happened and does it signal the start of an economic recovery?
In 2010 the US census bureau reported that the country’s level of credit card debt stood at $886 billion and was likely to rise to $1.177 trillion by the start of 2011. It also stated how the average cardholder owed $5,100 and then forecasted that this debt would rise to an average of $6,500 towards the end of the year.
Contrary to predictions, this scenario failed to play out and, although it still stands at a staggering $795 billion, credit card debt across the US has been in steady decline for well over a year now.
But this has little to do with the fact that Americans are paying off their credit card balances and more to do with the fact that banks are simply writing off bad debts.
An article from early 2009 published in the New York Times Business section told of how credit card companies were beginning to have to face up to the realization that many of their borrowers would simply not be able to pay their debts off as the economy deteriorated.
Banks and lenders came up with different strategies to prepare themselves for the anticipated wave of defaults. Some called in existing debts, cut credit lines and increased card fees whilst others cut borrowers some slack by waiving late fees and freezing, or in some instances lowering, interest charges.
So it appears that, sometime in 2009, lenders shifted their focus from fighting to be the first card at peoples’ fingertips to fighting to be the first to be paid back.
As Robert D. Manning, author of Credit Card Nation suggested, lenders were, and potentially still are, on the back foot: “Consumers have never been in a better position to negotiate a partial payment. It’s like that old movie ‘Rosalie Goes Shopping.’ When it’s $100,000 of debt, it’s your problem. When it’s a million dollars of debt, it’s the bank’s problem.”
Which brings us back to the position as it stands today, the debt is falling but not because it is being paid off by borrowers.
It seems that many lenders now feel that they have no option but to write of large chunks of bad credit card debt and so we currently have a situation whereby banks are writing off bad date at a faster rate than borrowers can amass new debt.
This would suggest that the credit card market is in a state of flux as, although consumers are ridding themselves of credit card debt, the banks are paying this debt for them. And whilst the figures look good, national credit card debt is falling and the banks are still in profit (apart from Bank of America) this is surely an arrangement that cannot be sustained over an extended period of time.
But, as long as the banks are still in profit, there is no cause for alarm just yet. Furthermore, as more consumers find themselves free from debt they may in turn find themselves with the capacity to start spending once more and so help to kick start the economy.
This, coupled with a drop in unemployment figures – last month saw unemployment drop to below nine per cent for the first time in two years – could, just maybe, signal the start of a small turnaround in the US economy.
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