The storyline in recent months has been that we are in better financial shape than we were this time last year. While that may be true by some measures, CardHub.com released the Q1 2010 Credit Card Debt Study this week, which revealed that consumers are on track to end up with more debt at the end of 2010 than 2009, despite positive signals in the economy.
The CardHub.com study focused on consumer debt data from the Federal Reserve’s G19 report in conjunction with quarterly charge off data to determine how much of the decline in consumer credit card debt is actually due to consumers paying down their debt versus bad debt being written off. The study also made projections on how much debt consumers will accumulate in subsequent quarters of 2010.
What we found is a strong indication that consumers might be falling into pre-recession habits, which we cannot afford in our fragile economy. One of the main contributors to the recession was that consumers had more debt than their income justified. In the third quarter of 2007, the debt-to-income ratio was 13.92 percent according to Federal Reserve data – this is higher than any period going back to the early 1980s.
Recently, we have seen a substantial decrease in outstanding credit card debt, from $973.2 billion at the end of 2007 to $829.4 in April of this year, and the debt-to-income ratio was down to 12.60 percent in the fourth quarter of 2009. Unfortunately the CardHub.com study proves that most of the reduction in these numbers is actually the direct result of people becoming delinquent on their payments and credit card companies having no choice but to write the bad debt off the books. Regardless of how the debt came down, however, it is important that we take advantage of the lower debt level now and not allow it to come back up.
With the unemployment rate at 9.7 percent (seasonally adjusted) – almost twice what it was three years ago – our economy simply cannot sustain pre-recession debt levels. Other fundamental weaknesses in the economy, such as a huge federal deficit, make it even more important that consumers remain fiscally responsible and are diligent in paying down their credit card debt in order to avoid future hardships.