Govt Report Shows Debt Dropping, But Credit Cards Haunt You Forever

The Fed is out with its latest report on consumer credit, and it’s filled with good news — kinda sorta. While the report says that, for the seventh consecutive quarter, consumers are borrowing less and paying off more of their debt, that doesn’t necessarily mean the economy is healthier. The numbers “can be a result of both tightening credit standards and voluntary changes in saving behavior,” said Fed economist Donghoon Lee. So, maybe you’re borrowing less because you don’t want to get stuck with more debt — or maybe it’s just because nobody wants to lend you money anymore.

Tod “Tightwad Tod” Marks of Consumer Reports looks at the glass and sees it as both half-full and half-empty. Well, maybe three-quarters empty:

It’s a positive sign any time consumers can decrease the burdensome weight of debt, Especially in light on the momentous problems of unemployment, still hovering at around 10 percent, higher property taxes many face, and flat or declining home values. The fact is Americans just don’t have as much to spend as they used to. Credit remains extremely tight. So this isn’t a huge surprise.

One form of debt that’s particularly hard to unload: credit-card balances. According to Consumer Reports, about 13.6 million Americans are still paying off their credit-card bills from last year’s holiday season.

Consumer debt keeps falling, but credit-card bills linger [Consumer Reports]
New York Fed Q3 Report on Household Debt and Credit Shows Continued Decline in Consumer Debt [Federal Reserve Bank of New York]

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  1. obits3 says:

    While I pay off my credit card every month, the more I think about it, the more I think that there should be a cap on fees and interest (say 10% a year average daily balance).

    The credit card companies could still compensate for risk of default by adjusting the line of credit and making the line a true line (if your max is $1000, then once you charge $1,000 you are done until you can get the balance under $1000).

    • Groanan says:

      Usury laws would be nice, I think we used to have them.

      If someone is willing to accept 30% interest on a loan, they are likely very desperate and lack any bargaining power at all. The Government should step in to keep us from taking advantage of each other in such situations (even though that means some people will not get credit).

    • JiminyChristmas says:

      The CARD Act of 2009 made a step in the right direction when it increased the percentage of one’s balance the minimum payment had to cover. In the past, it could take as long as 18-20 years to pay off a balance by making only the minimum payment. It’s not drastically different now, with payoffs in the 8-12 year range.

      Rather than outright caps on fees and interest, changing the minimum payment requirements so that a 3-5 year payoff was typical would give consumers a similar result. The higher minimum payments would deter people from borrowing more than they could reasonably finance.

    • Phexerian says:

      I think the cap on all interest in the US is 29.9%. Never seen anything higher than that.

      • AnthonyC says:

        Usury laws are state, not federal. A few months ago COnsumerist published a post about a card from a state with no usury laws- it had an 80% interest rate.

  2. hmac0167 says:

    If we start saving more as a country, our banks will have more money to lend, and we can stop borrowing money from China.

    • DeadFlorist says:

      Here, let me fix that for you:

      If we start saving more as a country, our economy will collapse and the Fed will print more money until our savings are worthless.

      • obits3 says:

        What if people use their savings to pay down their mortgages?

        • DeadFlorist says:

          If people are tossing their cash into the black holes commonly known as banks whether as savings or debt reductions, they are not spending it to buy big tv’s and tickle me elmo’s and Chryslers. This brings us back to economic collapse, the initial point.

          • LadyTL says:

            But those products aren’t really made much in the US anyways so it buying things doesn’t really help our economy it helps business and foreign countries.

          • obits3 says:

            My point was that a paid off house is protected from inflation. In times of high inflation it would seem best to reduce cash expenses as much as possible and move cash to assets that have utilitarian value.

      • hmac0167 says:

        That’s exactly what we are in now, a liquidity trap. But if we save more as a country, when the banks start lending again, it’ll be American dollars that they are lending. The public won’t be getting their loans backed by the Yuan anymore.

        • DeadFlorist says:

          ?, I’m pretty sure that U.S. banks lend dollars, now and in the foreseeable future. I also don’t think the dollar is “backed” by the yuan. I don’t think the dollar is backed by much of anything, which is why Backstop Ben can roll them off the printing presses with abandon, and give them to the banks to theoretically lend out, rendering our savings rather a moot point, no?

      • A.Mercer says:

        Well, it’s rather brutal here. Right now we are advising all our clients to put everything they’ve got into canned food and shotguns.

    • Loias supports harsher punishments against corporations says:

      Wouldn’t it make sense to say as we start saving, banks will have less to loan out? After all, charging costs interest which is given to the banks which amounts to profit, which means more liquidity to give out. When we are saving, the bank must pay us interest on the amount saved, which means less profit for them and thus less they can loan out.

      • AustinTXProgrammer says:

        That money is for the shareholders. They don’t have to pay depositors interest, that is decided by the market. If lots of people save and people don’t borrow, the retail interest rates will drop (absent action by the Fed).

        Banks can loan out a percentage of their deposits (I believe it is over 100%, the difference is made up by borrowing from other banks or the Fed). We are outside of my domain here so I can’t be more specific, or I might be wrong in places.

        But I do know deposits are used to fund loans.

    • Blueskylaw says:

      If banks have more money to lend out that means that there will be an excess of cash. Taking simple supply and demand into the equation that means interest rates will fall on savings.

    • Erik Hughes says:

      Banks have plenty of money to lend right now.

      http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=WRESBAL&s%5B1%5D%5Brange%5D=5yrs

      They just aren’t lending because a) people aren’t asking for it b) they can buy treasuries for a guaranteed profit instead of making risky loans.

  3. pecan 3.14159265 says:

    According to Consumer Reports, about 13.6 million Americans are still paying off their credit-card bills from last year’s holiday season.

    This, coupled with the statistic about 84% of parents taking their kids to McDonalds in the past week makes me weep for humanity.

    • obits3 says:

      *greasy tears*

      • pecan 3.14159265 says:

        Hahahaha! I wonder how many of these kids end up at McDonald’s because their parents go to the mall to do their holiday shopping.

        • obits3 says:

          Be sure to super size it on your credit card! After all it will only take you 3 x 10^∞ years to pay off with the minimum payment ;)

    • PencilSharp says:

      Wah.

      Actually, pecan, taking both stories into account, you should be getting heartburn once you realize that you’ll be paying for all these yahoos in the form of higher interest rates, tighter credit, and onerous taxes once the health care “reform” takes hold.

      • Loias supports harsher punishments against corporations says:

        Nice propaganda plug. Should we also expect death panels inside our banks and McDonald’s, too?

        When everyone has health insurance, it becomes cheaper. People also become healthier, which makes it cheaper.

        • Evil_Otto would rather pay taxes than make someone else rich says:

          Shh, logic confuses them.

        • MitchV says:

          This is why life expectancy in the US for those who are insured, exceeds those of any other nation. Right?

          Preventative health care is overwhelmingly cost effective, but lack of health insurance does not address many of the underlying causes of health issues in this country.

          I have to laugh when I see all the whining at this blog over the grocery shrinkray. Wouldn’t it be tragic if people in the US were forced to live off of European food portions?!?!

  4. Supes says:

    “13.6 million Americans are still paying off their credit-card bills from last year’s holiday season.”

    That just stuns me. It was almost a year ago, and this holiday season is just around the corner.

    • pecan 3.14159265 says:

      I don’t understand why Christmas gifts are so important you put it all on a credit card knowing you won’t be able to pay it off at the end of the month.

      This is totally different from the zero interest cards that some retailers roll out for large appliances – I totally understand why you’d take advantage of those and still be paying them a year later.

    • Jevia says:

      Yeah, we’re still paying off the airline tickets to visit family last Christmas. This year, family is visiting us, so at least we’re not adding to that debt.

      • Loias supports harsher punishments against corporations says:

        In that case I’d say it’s okay. As long as you have a planned budget to account for holiday spending and a timetable to pay it off.

        But for the majority of people under that category that have not paid off last year’s spending, then clearly they’ve in the beginnings of a debt spiral.

    • Gulliver says:

      Are they paying off a zero interest credit card? It is still debt even if the rate is 0 per cent or 100%?
      I’d say based on a population of 300 million people that is around 4.5% of the population. That seems good to me.

  5. Buckus says:

    If you balance-transfer the bill from last year’s holiday spending to a 0% limited-time offer, does that count as paying off the bill?

    What? I’m doing it wrong…dang.

  6. chaesar says:

    I knew this girl in college, she was a total donghoon

  7. areaman says:

    I see this as a ‘structural change’ in America. Deleveraging and using savings for investments. Oh and returning the housing market to a reasonable proportion of the economy.

  8. INsano says:

    The WSJ and the NYT have covered this; the vast majority of this “reduced debt” Americans have is because the credit card companies are writing off the debt as losses that will never be repaid, not because Americans are finding money, earning and saving more and paying down their financial obligations.
    Americans don’t have billions to pay down debt–they can’t even pay their rent or mortgage.

    • Kimaroo - 100% Pure Natural Kitteh says:

      I disagree. I work at a small credit union and our members have been paying off their loans early and often. If they get a bonus, it comes to us to pay off their car. One person won some money out of a slot machine and he paid his car off with it.

      The rest of them are saving like mad, especially with the increased federal insurance amount for savings accounts.

      “All Americans” aren’t underwater on their mortgage or drowning in debt, a lot are paying their bills off because that is a new priority for them. They think they might be laid off in the future so they are paying things off now while they have money.

      I do know a lot that are having troubles as well, and that is bad, but I couldn’t tell you that they are the majority.

  9. JiminyChristmas says:

    Unless some radical changes occur, working and middle class Americans should prepare for a long-term reduction in their standard of living. Wages have stagnated for the past 30 years and people are out of tools for increasing their access to cash.

    Family income was bolstered for many years by women entering the workforce as well as all workers putting in more hours. When that trend started to slow is when revolving credit card debt began to grow exponentially. As unsecured credit card debt was becoming unsustainable the housing bubble came along. That kept the party going for another 10 years as people rode the wave of asset inflation and used home equity loans to fund their lifestyles.

    What next? Even if the employment situation weren’t so brutal there are no more breadwinners to put into the workforce and the ones that are already in can’t work more than they already do. As the article states, access to unsecured credit has been drastically curtailed. A plurality of homeowners have little or no equity in their property. Treading water and servicing their debts are the only options left for many people.

    • AnthonyC says:

      This trend, I fear, will not change until the salaries of workers (including knowledge workers) in other countries approaches those of US workers. Except, of course, for workers who offer something extra- like higher productivity or useful creativity.

  10. yzerman says:

    wait for after christmas..

  11. Arcaeris says:

    I wanted to get rid of my credit card debt. I tried to get a personal loan to do it, but all the loans I applied for ended up having a higher interest rate than my credit card. I could have sold my car (paid off) and paid off my debt, and used the down payment to buy a new car (or save it) and come out way ahead because for some reason the car companies will give me a 0.9% interest loan but no bank will give me one with less than 16% – even if I put my same (paid off) car up as collateral on a loan.

  12. Grandpa_O says:

    Things that make you go ‘WTF?’

    After years of on-time over payments to reduce my card balance, BofA sent me a note informing me that they are reducing the amount of available credit. So instead of having a balance that was about 50 percent of available credit, I will now have a balance that is 90 percent of my new credit limit.

    Let’s see, BofA made literally thousands of $$ in interest (@ 12.5%) off of me. I haven’t been late with a payment in 3 – 4 years. I haven’t charged anything on the card in 3 – 4 years, & I’ve reduced my overall debt. But now, BofA is going to hose my credit score by making it appear that I have too much debt compared to what my credit limit will now be.

    Not sure how the new credit card act really helped the conscientious borrower. ‘WTFO?’