Study Finds Consumers Accumulating Debt in Fragile Economy
The Federal Reserve recently released data that showed that credit card debt decreased by over $12 billion in the second quarter of 2010 relative to the first. This is good news, right? Not when you take a closer look.
In CardHub.com’s Q2 2010 Quarterly Credit Card Debt Study, we found that the decrease in consumer credit card debt was entirely due to charge-offs, as opposed to consumers actually paying down their balances. A bank charges off credit card debt once a consumer has become 180 days delinquent in making a payment. If debt is charged-off it means that the bank considers it a loss and it is written off the books.
The story in recent months has been that consumers have become more frugal since the recession and have ratcheted back their spending and borrowing. However, if you look at the debt data in conjunction with the banks’ charge-off rates, you see an entirely different picture. Once the $21.8 billion in charge-offs is considered, consumers actually accumulated $9.8 billion in debt in Q2 of 2010.
This is alarming for a few reasons. First, the current state of our fragile economy cannot sustain pre-recession debt levels. One of the greatest contributors to the recession was that consumers were taking on more debt than their incomes justified. An increase of $9.8 billion in credit card debt, which is almost 250 percent more than the increase in the same quarter last year, indicates that consumers are falling into pre-recession habits, and at an increasing pace.
Secondly, if consumers continue to accumulate debt at their current pace, we are on track to end 2010 with at least $26 billion more in credit card debt than we had at the end of 2009. Given that the unemployment rate in June of 2010 was 9.6 percent (not seasonally adjusted), it is highly unlikely that consumers’ income can justify and support this overall increase in credit card debt.
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