Picture of the Day: Consumers and Their Credit Cards

Down a lot, still got a long ways to go.

Morgan Housel
Morgan Housel
Jun 14, 2010 at 12:00AM

Have a look at outstanding revolving credit (almost all of which is credit card debt) over the past eight years:


Source: Federal Reserve.

Two things stick out:

  1. Holy smokes: Credit card debt has dropped precipitously. That's great news! It's step one in repairing household balance sheets, which were pillaged over the past decade.
  2. As large as that drop appears, credit card debt is still about where it was in 2006. By any measure, that was a time of debt gluttony and irresponsibility. Nominal GDP is about 7% higher today than it was back then, so the comparison isn't perfectly apples-to-apples. But the 2007-2008 spike in debt was so fierce that even a large decline in total credit card debt only brings us back to still-bubble-year levels. There's more work to do, in other words.

There are four main reasons credit card debt levels have fallen so quickly. One, consumers are paying it off. That's obvious. Two, they're defaulting on it in droves, which has become a convenient way to shed debt. Three, credit card giants like Citigroup (NYSE: C), Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) have drastically cut available credit lines, so increasing debt isn't possible in some cases, and hence balances fall consistently, with even minimum monthly payments. Four, some consumers who selectively default on their mortgage use the cash that would have gone toward housing payments to pay down credit card debt. In the last quarter of 2009, 6.6% of the population was current on their credit cards, yet delinquent on their mortgage.

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