In a recent report to Congress, the Board of Governors of the Federal Reserve System shared the progress accomplished in lowering the nation’s credit card debt. By the end of 2012, cardholder debt was lowered to $850 billion, a significant decrease from the 2008 peak period when consumers owed more than $1 trillion. Additionally, card delinquencies that peaked in 2009 at nearly 7 percent shrank to only 2.7 percent by the end of 2012, their lowest levels since 1994.
These findings are measurable signs of progress that America’s consumers have accomplished. It’s also particularly welcome news for those who chose to cut back on spending in an attempt to survive the Great Recession.
But there were also other factors unrelated to consumer behaviors that contributed to the drop in delinquencies. For example, during the Great Recession, many credit card issuers tightened credit availability, leaving many consumers with lowered lines of credit. In some cases these reduced credit lines resulted in some consumers with debts larger than the new authorizations. In such scenarios, consumers were left with two choices: keep paying the issuer but lose use of the card, or find an alternative way to pay off the debt in a lump sum.
If consumers had possessed the financial wherewithal not to incur thousands of dollars in debt, card overages and/or delinquencies would not have happened. So it is reasonable to infer that millions of customers took the only viable option: pay down the debt as best one could. By the end of 2012, according to the Fed, consumers used only one-quarter of the total dollar amount available on their revolving lines of credit.
However, while most card usage declined, many issuers created another revenue stream by encouraging customers to use their authorized credit lines for cash advances instead of closed-end installment loans. Unsolicited offers usually sent by mail offered either a no-interest grace period or a rate lower than that of other transactions until the cash advance was fully repaid. According to Mintel, a research firm, more than a billion of these offers were mailed in 2011 and in 2012. However, some of these cash advances may not afford the same consumer protections as card purchases. There are significant concerns that these offers could signal a return of some of the unfair and deceptive practices that inspired the CARD Act.
Similarly, TransUnion, another financial services firm, analyzed credit card debt and found that as of the end of 2013’s second quarter, that average cardholder debt was $4,965.
For some families, $5,000 of debt would appear manageable. But as earlier research by the Center for Responsible Lending (CRL) has found, the typical household has just $100 left each month after paying for basic expenses and debt payments.
For these families, the average credit card debt will likely linger a while. Further, according to CRL, many low and moderate income households still turn to credit cards to pay for basic expenses at the rate of 40 percent. Credit card debt has also stemmed from out-of-pocket medical costs for 47 percent of low and middle income families. And among families struggling with the challenges of unemployment, 86 percent racked up credit card debt.
So how are these debts doing across the country?
TransUnion’s analysis also compared credit card data by state. Only three states accomplished year-to-year debt declines from 2012-2013: Oregon, Nevada and Colorado. Despite Colorado’s steady decline in credit card debt, it remains one of the highest credit card debt states, along with Alaska, Connecticut and North Carolina.
Only two states, Indiana and New Hampshire, had credit card customers that increased usage during these years.