Study Shows Consumers Adding Credit Card Debt at Alarming Rate
While U.S. consumers paid down over $32 billion in credit card debt during the first quarter of 2011, this net decrease has already been completely nullified, according to the recently released Q3 Credit Card Debt Study from Card Hub. After garnering $18 billion in new debt during Q2 2011, the third quarter of the year saw consumers add $16 billion more to their unpaid credit card balances. Since this marks the first time in at least the last three years that a first-quarter pay down was wiped out before the fourth quarter began, and recent history shows that fourth-quarter debt increases tend to be larger than their second and third quarter predecessors combined, Card Hub estimates that consumers will end 2011 with $64 billion in new credit card debt relative to 2010.
Card Hub used information from the Federal Reserve’s G19 report as well as quarterly charge-off data – bad debt written off lenders’ books, yet still owed by consumers – to reach these conclusions. Though this data is inflated by balances held on secured credit cards and balances that will be paid in full by the end of the month, such information is always included in examinations of consumer debt and usually represents the same proportion of overall debt. The relative difference in credit card debt from quarter to quarter is therefore a very strong indication about actual debt held on unsecured credit cards. The Q3 2011 debt build-up was 154 percent greater than what occurred during the third quarter of 2010 and 58 percent larger relative to Q3 2009.
Myriad factors likely contribute to this alarming trend, but a combination of increased consumer confidence in the economy, and a slow-to-come realization that pre-recession spending levels were inextricably tied to the housing bubble, are certainly driving forces.
With credit increasingly available and more people back at work – November marked a 32-month low in unemployment – consumers are feeling freer to buy. This, in and of itself, is not an issue, but overleveraging is what got us into trouble during the Great Recession. It is important to note that overleveraging does not happen overnight, but rather occurs gradually, and the trend of consumers incurring more and more credit debt each quarter would seem to fit the bill.
Consumers are not without options, though, in terms of reversing this trend. Budgets are obviously useful, but before drafting a monthly spending plan and sticking to it, take a crack at eradicating wasteful spending and altering purchasing habits. This is certainly easier said than done, as the ubiquity of smartphones and daily deal websites makes it seem that no matter where one looks, there is a sale to be taken advantage of. But instead of rationalizing why we need the goods and services being hocked, try applying a subsistence test of sorts to any potential new purchase. The key question to ask: How much does not having this truly inhibit me on a daily basis?
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