Credit Card Debt Problem

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The following article appeared at USA Today:

Lower credit card debt traced mainly to charge-offs By Christine Dugas, USA TODAY Americans cut more than $93 billion in credit card debt from 2008 to 2009. Good news, right? It's not what it seems, according to an analysis of federal data by CardHub.com, a credit card comparison website. Rather than turning wholly frugal, consumers instead fell further behind on bills in 2009, causing a surge in debt charge-offs, says Odysseas Papadimitriou, CEO of CardHub.com. Consumer debt related to credit cards fell from $969.3 billion in the fourth quarter of 2008 to $876.1 billion in the fourth quarter of last year. "When consumers are paying back more, that's a sign of great financial health," says Papadimitriou. But his analysis shows that in the third quarter of last year, bank charge-offs reached their highest rate since 1985. Charge-offs occur when consumers declare bankruptcy or when their credit card debt is 180 days past due. The study found that 90% of the $93.2 billion decrease in credit card debt was attributable to bad debt being written off the books. Only about $10 billion was related to consumer payoffs, and most of that occurred in the first quarter of last year. The average U.S. household has nine credit cards. Credit card use and card companies' practices have been under scrutiny since the recession began. In the past year, credit card companies and banks have reduced credit limits, giving consumers less access to capital. And as card interest rates have gone up, many consumers have turned to debit cards instead. A host of new federal regulations for credit card companies went into effect last month. More rules have been proposed, and they will go into effect this summer. The economic recovery may help more consumers start repaying their debt. But it's hard to know "if they have learned a lesson and are going to be more responsible," Papadimitriou says. "Or will they quickly forget what happened and start pulling out their credit cards again and start charging up?" John Ulzheimer, president of consumer education for Credit.com, is cautious in predicting whether consumers have changed credit card habits. "I think that the assumption that people have learned their lesson and are going to change how they use credit cards is a little bit optimistic," he says. "I think the reality is that most people want to continue to use credit cards, will continue to use credit cards, and as soon as banks start loosening the purse strings, they will increase the use of credit cards," Ulzheimer says.