Michael on December 9th, 2009
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Last week I discussed Why the drop in late credit card payments doesn’t excite me. Then, I covered The real unemployment rate just this past Monday.

To continue my little rant on misleading statistics today I discuss the phenomenon of lower credit card balances.  Analyzing TransUnion data, the AP reported the credit card delinquency decline here and a Fed G19 study further analyzed by Credit Cards.com here discussed the decrease in revolving balances.  So, there’s a good deal of excitement.  After all, lower credit card balances are a good thing.  Notwithstanding the government’s obsession that we “spend our way out of this,” I believe that people shouldn’t spend money they don’t have. (I also believe the same rules should apply to governments of either ruling party but that’s a whole ‘nother discussion.)

But why are credit card balances lower now than they were previously?

Best I can tell, there are three reasons for the credit card balance decline:

  1. People are using their credit cards less. Call it the fear factor, but there’s nothing more influential in increasing your savings rate than seeing a friend or loved one lose their job.
  2. People have had their credit limits cut. Some folks would probably continue to use their credit cards as they have in years past but now, quite simply, can’t.   The banks won’t let them.
  3. Banks have issued massive write-downs. We’ve read about government bailouts of big financial institutions  because of their bad debts.  Guess who else has been issuing bailouts?  Yup, the banks for certain borrowers.  When you can’t pay and convince the bank you won’t, the bank eliminates the amount you owe.

All three of the aforementioned factors must affect our nation’s average current outstanding credit card balance.  I see a lot written about the impact of the first reason, a little about the second factor, and virtually none about the third component.

An article I was interviewed for earlier this week, Consumer credit card balances fall again in October, Fed says fairly summarizes my position.

What do you think?  Are people really changing their credit card utilization or is that only part of the cause of the balance drop, since many others are spending less on credit cards simply because the banks will no longer allow them spend like they used to?

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3 Comments to “The real reason credit card balances are falling”

  1. Abigail says:

    I agree that part of the falling-balances situation is because companies are cutting credit lines. But I have to disagree about the write-offs.

    If you get so far down past your due-date that your balance is written off, you’re generally no longer an active customer. Which means your account wouldn’t be categorized as a “revolving balance.” Revolving balances are only the ones that are still active — if you pay it down, you have it available again.

    I think mostly it’s just people panicking. They finally realize that they have to get rid of the higher balances because they’re in trouble if money dries up. (Or they become unemployed and realize that they had better pay down whatever they can while the unemployment pay is still available.)

    That said, I, too, am not at all excited by the new statistics. People have “learned their lesson” off and on again for decades. It doesn’t last. I really doubt that this instance will make much more of an impression. I suppose a few will stay frugal. But there are too many shiny things out there, and the American public has too short an attention span.

  2. Michael says:

    @Abigail: Thank you for your comments. At the end of the day, it sounds like we’re in the same boat with respect to our expectation that real change isn’t likely to be long-lasting.

    As to your comments about write-offs, here’s my thinking:

    If, last year, you were a little behind (or even current) with a big balance, it would be part of the revolving balance. Now, this year, let’s say you’re so far behind that your balance is written off. As you point out, you’re no longer part of the revolving balance statistic. Therefore, by having your balance written off, you’ve helped the national average.

    It’s kind of like when an unemployed person stops looking for work or takes a part-time job – he’ll no longer be considered part of the unemployed for statistical purposes. The country looks better, but he certainly is not.

  3. Adam says:

    Michael:

    The New York Times shares your opinion as well:

    http://www.nytimes.com/2009/12.....s.html?hpw

    -Adam

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