Falling Consumer Debt – It’s Not All Good News
On May 7, 2010, USA Today, citing data from the Federal save Board’s monthly G-19 report, reported that US credit card debt fell again in March, marking the 18th month in a row that credit card debt has decreased. It should be noted that consumer spending has increased for 6 months straight. An increase of spending and a decline in credit card debt may indicate a meaningful change in the consumption pattern of the average American, but that is not the only factor involved. A portion of that credit card debt reduction is due to credit card lenders writing off uncollectable debts, losses that are sure to be felt in the overall economy.
In his recent article, “Is It The End of The US Consumer’s Love Affair With Credit Cards?”, Richard Bialek, CEO of BialekGroup, noted that “over the past 18 months the level of consumer credit card debt has fallen to $852.2 billion, a decline of 12.6 percent.” While certainly, American spending habits do seem to be changing, this reduction of credit card debt is not merely the consequence of a new-found fascination with frugality, nor is it altogether good news regarding the overall health and well-being of the economy.
Time Magazine, in a recent article, noted the continuing trend of consumers that, when forced to make a choice by financial circumstances, are choosing to pay their credit card bill instead of their mortgage. On April 15, 2010, CNNMoney.com weighed in on the subject, relating this uncommon trend to falling home values resulting in underwater mortgages and a lesser commitment to homes that no longer make financial sense. With the foreclosure backlog allowing many to keep in homes for months, already years, before being formally put out, it makes more sense to many people to pay the credit card bill, because that credit card is increasingly being used for essentials between paychecks, in addition as for the unexpected emergency, such as an auto repair.
Not all of the decline in consumer debt is due to a reduction in credit card use by consumers or to people making the paying down of their credit card debt more of a fiscal priority than it has been in the recent past. According to a March 9, 2010, CBS Money Watch report, when the numbers are run, it turns out that the reduction in credit card debt is far less related to consumers paying down their debt than it is to lenders writing off bad loans. Once the lender acknowledges that the card holder is not going to pay off the debt, and the charge-off becomes formal, the amount is subtracted from the total credit card debt figures.
This reduction in credit card debt, then, holds meaningful implications concerning the state of the economy and its overall health and well-being. According to an article published in the Washington Post on May 30, 2010, “the three biggest card-issuing edges lost at the minimum $7.3 billion on cards in 2009. Bank of America, after earning $4.3 billion on cards in 2007 — a third of its total profit — swung to a $5.5 billion loss in 2009. J.P. Morgan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter.” It should be noted that these edges, as are many other lenders currently experiencing from record levels of card charge off losses, are nevertheless dealing with the wreckage of the mortgage and lending melt-down, including the resulting sharp rise in foreclosures.
“We have a business that is hemorrhaging money,” said the chief executive of Citigroup’s card unit, Paul Galant, as quoted in the Washington Post. According to the article, “Citi-branded cards lost $75 million last year.” The article also cited information garnered from R.K. Hammer Investment Bankers, suggesting that “U.S. credit card issuers wrote off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008.” Furthermore, with the new credit card regulations that came into effect in 2010, lenders expect to see profit margins tighten further as some of the practices that had been big revenue raisers in the industry are now extremely.
“J.P. Morgan chief executive Jamie Dimon,” as explained by the Washington Post article, “said during an earnings conference call in April that the changes will cost his bank up to $750 million in 2010. edges overall could lose $50 billion in revenue during the next five years, said Robert Hammer, chief executive of R.K. Hammer Investment Bankers.” Naturally, in response to outright losses and reduced profit potentials, “the big six issuers have trimmed total credit obtainable to their customers by about 25 percent partly by shrinking credit lines and not renewing expired cards, said Moshe Orenbuch, a bank analyst at Credit Suisse Group in New York.”
This contraction of credit will affect consumer spending to a meaningful degree. In the current structure of the American economy, in which a complete 70 percent of it relies on consumer spending, that reduction does not bode well for an already dismal employment situation. Businesses that are not profiting will not be hiring workers. Indeed, lay-offs can be expected. Further job losses and increased job stability concerns can logically be expected to encourage careful spending on the part of the consumer, begetting a cycle that is difficult to break out of.
It is a difficult economic situation. However, it is does not have to be an economically devastating one for the nation. The edges will continue to struggle, and edges will continue to fail. Credit is likely to continue to contract, but that may be a healthier thing for the average consumer — and consequently the nation – as people become more careful with their spending and the economy develops in new ways to adjust to that shift, lessening its reliance on the sort poor money management that results in heavy debt loads for purely consumptive spending, as opposed to that which is productive and functional.