Last week, I cited a Federal Reserve report showing that credit
card use has been falling steadily since mid-2008, and suggested
that Americans might finally be "getting the message" about credit
card debt.
I wrote
that article
after looking at a bunch of data suggesting that Americans have
been "deleveraging," using their resources to pay down debt instead
of spending more. That seemed like a great trend, one worth taking
a closer look at.
But there's a problem: Upon closer examination, there's very
little "deleveraging" going on. That disappearing debt load turns
out to be made up mostly of
defaults
.
So much for a smarter America
As a
Wall Street Journal
report pointed out yesterday, there are two ways in which debt can
decline: It can get paid off, or it can go unpaid to the point
where the lender charges it off. Over the two years since June
2008, the total value of home-mortgage and consumer debt fell by
about $610 billion. But the
Journal
's analysis of new data from the Federal Reserve suggests about a
$588 billion reduction came from charge-offs.
The high level of charge-offs isn't exactly a new revelation, as
Fool Morgan Housel has been
on this story
for a while. But it is sobering to consider the ultimate statistic:
The household debt decline that can be attributed to the kind of
financial discipline we've been
hoping
to see is trivial -- an annualized rate of decline of
0.08%.
That's
peanuts
.
And we're not done yet
Now to be sure, the worst of this is probably behind us. When
charge-offs and delinquencies at
JPMorgan Chase
(
JPM
) ,
Citigroup
(
C
) , and
Bank of America
(
BAC
)
fell in the second quarter
, it was reasonable to conclude that the nastiest debt had been
purged from the system. Things appeared to be stabilizing, albeit
at a high rate. Overall charge-offs were at 10.66% in the second
quarter, according to the Federal Reserve, well above the 3%-4%
that was typical before the economic crisis.
But a report last week suggested that there might be more pain
to come, as several credit card issuers saw their charge-off rates
rise in August.
Capital One
(
COF
) reported its first increase since March, charging off 8.19% of
balances. Likewise,
Discover Financial
(
DFS
) saw its first increase since May, and
American Express
(
AXP
) , which has had a much lower charge-off rate than other big
issuers, saw write-offs hold steady at 5.5% in August, after months
of decline.
Clearly, people still aren't getting the message.
Don't play this game
Carrying a credit card balance has never been a great idea, but
even financially prudent folks sometimes end up with a big balance
during tough times. But this data suggests that the forces
constraining consumer spending have more to do with increased
discipline from the banks than with financial prudence on the part
of consumers.
But cultivating that financial prudence is critical, especially
when it comes to credit cards:
-
Banks are not your friends.
The Credit Card Reform Act
outlawed several
of the banks' favorite tricks for maximizing the amount of money
taken out of your pockets, but credit cards are
big
business, and already the banks have come up with new ways to
preserve those revenue streams. Those ways, shall we say, do not
work to consumers' advantage. Don't play their game.
-
Balances are wealth-busters.
A credit card balance is a money sink -- even if you're not
buying anything new, you're still paying, every month. The money
going toward those payments could be used for stuff you need,
stuff you want, or -- better yet -- building your wealth over
time.
Long story short, if you have a credit card balance, it's worth
doing all you can to get rid of it -- while credit cards have their
place in an era when home equity may have disappeared and emergency
funds may be thin, running a big balance is an expense you really
can't afford.
Is the banks' newfound lending prudence holding up the
recovery? Fool Morgan Housel says it's time to stop blaming the
banks for the terrible economy.
True to its name, The Motley Fool is made up of a motley
assortment of writers and analysts, each with a unique
perspective; sometimes we agree, sometimes we disagree, but we
all believe in the power of learning from each other through our
Foolish community.
Fool contributor John Rosevear has no position in the companies
mentioned.
American Express and Discover Financial Services are
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