Still in love with credit cards

Unemployment rates were at record highs last year and incomes at record lows. So how can it be that consumers managed to pay down credit-card debt last year? Credit-card debt in the United States dropped significantly last year, but a new MoneyNews article suggests that Americans are still in love with credit cards: The bulk of the decrease resulted not from payments but from charge-offs.

Banks and credit-card companies typically charge off debts once they’re 180 days past due, and the Federal Reserve does not separate charge-offs from debt payments when reporting national credit-card debt-reduction figures. According to a study analyzed by MoneyNews, lenders charged off a record-breaking $83.27 billion of credit-card debt last year, which accounts for the lion’s share of the $93.2 billion drop in card balances.

Debt reduction due mainly to lender charge-offs

According to government reports, as of January 2010, credit-card balances have been declining for 16 straight months. But according to the study, the first quarter of 2009 was the only time during that 16-month period when consumers actually paid down card balances. In that quarter, consumers paid down card balances by $46.9 billion, and lenders charged off an additional $17.59 billion. After the first quarter of 2009, national card balances either increased or remained steady.

Credit-card debt is down, but not paid down

The study suggests that consumers have not, after all, been paying down credit-card debt, and the record-breaking lender charge-offs for last year evidence the financial pressure faced by many Americans. Credit-card debt charge-offs were a record-high of 10.1% in the third quarter of 2009. The rate was somewhat lower in the last quarter, but the situation is expected to become worse. According to MoneyNews, Moody’s Investor Service predicts that the charge-off rate will reach 12% in 2010. By way of comparison, in the fourth quarter of 2006, a year before the current economic downturn began, the charge-off rate was a mere 4%.

Which is not surprising

It should come as no surprise that unemployed and underemployed Americans are still financially stressed and leaning on credit cards and emergency cash loans. Increased charge-offs by lenders is just one more ripple in the ever-expanding ripple effect of the recession.