Charge-Offs Resulting in Lower Credit Card Debt

It might sound like a good thing that Americans have lowered their credit card debt by more than $93 billion overall. But when you know the reason why the debt has been lowered by that amount, it won’t sound as good.

According to CardHub.com, a website that compares credit cards, Americans are not becoming more frugal but rather falling farther behind in their credit card bills. According to statistics, consumer debt fell from $969.3 billion in the fourth quarter of 2008 to $876.1 billion in the last quarter of 2009. But in the third quarter of 2009, bank charge-offs were at the highest they have been since 1985. This happens when consumers either declare bankruptcy or when their credit card debts become at least 180 days past due.

Unfortunately, about 90% of that decrease in credit card debt was due to bad debts being charged off. Only about $10 billion came from payoffs. What’s even worse is that much of that debt was paid off in the first quarter of 2009.

Many consumers are turning to debit cards due to recent restrictions and limits placed on consumers. The average American household has nine credit cards, but they are slowly turning away from them as interest rates continue to rise and as they fall deeper into debt.

On the bright side, it looks like the recent economic recovery may be good news. With the new regulations placed on credit cards, it may help consumers get control of their debt and pay it off sooner. One of the new regulations is that credit card companies must include a graph on how long it will take a consumer to pay off their balance if they simply make the minimum payments and how much they will pay by the time they pay it off. The card companies must also include a graph which shows how much they will have to pay each month in order to pay off their balances within three years.

However, it remains to be seen if the average American consumer has learned their lesson. How soon will they forget about how easy it was for them to fall into debt? Once they reduce their debt, how long will it be before they start charging stuff again. According to John Ulzheimer, the president of consumer education for Credit.com, assuming that people have learned their lesson is a bit “optimistic.” He believes people will continue to use their credit cards and submitting applications as soon as banks start loosening their regulations on credit.

Everything right now is speculation and nobody knows for sure what would happen if people actually paid off their credit card balances en masse. It would, however, be a great thing for individual households and for the economy in general.