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:
- 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.
- 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.
- 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?
Tags: credit cards