Debt charge-offs not consumer payoffs reducing credit card debt
Filed under: Credit, Debt, Credit Cards
We've been hearing for the past 16 months that consumer debt is going down. Well, it's not because people are paying off their debt more aggressively.Instead, we've learned it's because credit card companies wrote down $83 billion of the $93 billion in credit card reductions. Consumer credit card debt declined by just $10 billion with most of that pay down in the first quarter of 2009.
That's what Odysseas Papadimitriou, CEO and founder of CardHub.com, concluded after he took a closer look at the data from the Federal Reserve. Papadimitriou worked for eight years at Capital One's credit card division before starting CardHub.com. He has his MBA from Duke University.
Papadimitriou questioned the numbers the Federal Reserve put out because, he said in a phone interview today, "They just didn't make sense when you consider economic conditions." He gave three reasons for his doubt:
- Credit card issuers raised rates "extremely," meaning that more and more of a consumer's payment would go toward paying interest rather than paying down debt.
- Record unemployment rates, which means fewer consumers can afford to pay down debt.
- Record bank losses.
"From my experience, when consumers pay more, their finances are healthy," Papadimitriou said. He also added that we were seeing "record losses from the banks. That doesn't go hand-in-hand with credit card payoff."
To reach his conclusions, Papadimitriou looked at the Federal Reserve's monthly G.19 Consumer Credit Report, which last week showed data that made December 2009 the 16th consecutive month that revolving consumer credit decreased. He compared that data to the Fed G.19 reports for 2009, which examines the quarter-over-quarter and year-over-year change in revolving credit. What he found was very telling.
In the first quarter of 2009, consumers paid down $64.5 billion in credit card debt vs. $17.6 billion in write offs. Banks must write off an account when it's 180 days past due or when the consumer has filed bankruptcy. So write downs are done every month, Papadimitriou explained. He credits consumers for this pay-down for three reasons: tax refunds, year-end bonuses from work and a cutback in spending after the holiday season. That's a relatively normal practice each year.
But after the first quarter of the year, the story looked very different. In Q2 of 2009, credit card debt stayed constant between Q1 and Q2. By Q3 of 2009, consumers had accumulated more debt, and by Q4, outstanding credit card debt had increased by almost $21.5 billion.
"No matter how much consumers want to pay down debt, if they don't have a job, there's not much they can do." Papadimitriou added.
He thinks the economy has reached the bottom, though, and people are starting to find jobs and again be able to pay down debt, which is a good sign. Interesting enough, however, instead of paying down debt, the numbers seem to indicate consumers are in a good mood and spending again.
Papadimitriou said the country went into this recession with consumer spending out of whack and that a period where consumers show restraint is needed. But, he said "Consumers are falling back into this same imbalance, which isn't good for anyone."
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Personal Bankruptcy" and "The Complete Idiot's Guide to Improving Your Credit Score."
MoreOli Scarff, Getty Images
- IT'S ON: Behind the War Between Obama & Big Biz - FORTUNE
- TOUGH BREAK: Toyota Recalls 400K Cars Over Steering Issue - CNNMoney
- 'SPILLIONAIRES': Who's Set to Profit From the BP Oil Spill? - Huffington Post
- BANG PER BUCK: The Most Efficient Companies on the Planet - The Motley Fool
- NO MORE COACH POTATOES: Gadgets to Take TV on the Go - FOX Business
- THE PULSE: Economic Signals From Cereal & Toothpaste - CNBC
- WHAT NOT TO WEAR: 10 Office Fashion Don'ts - Forbes
Reader Comments (Page 1 of 3)
3-10-2010 @ 3:33PM
carguy622 said...
Stop this ride I want to get off!
I paid off my credit cards last November, and have not run up a balance since, nor do I plan to. I was living above my means for several years, and living on a budget and having no debt is much, much better. I may not be buying all the fancy toys I used to, but I sleep better at night.
Reply
3-11-2010 @ 7:04AM
Victoria said...
I agree with this article. The same goes for unemployment claims being down. It is not that many are going back to work, it is that many are no longer eligible for unemployment compensation so they are not counted. The numbers do not display the real situation. Things simply are just not a lot better and they won't be for years.
Reply
3-11-2010 @ 8:54AM
Jane said...
I paid a debt settlement on my credit card. A lot of the balance was interest and I didn't really feel it was actual purchases made by me and they could forget these interest charges. But what they're not telling you is that I received a 1099C form in the mail that I have to claim as income on that portion that I didn't pay although they showed the account as paid off. You still pay in the end. My situation is like many others being that I'm now jobless but to make matters worse I became a widow very suddenly and he left debts that I also had to pay which left me in more of a mess. Like I said before you still pay in the end.
Reply
3-11-2010 @ 9:24AM
Leslie said...
Jane...check with the IRS. We settled 3 of our credit cards last year, but the IRS told me of a form to fill out with my taxes to have the written off debt not included with our income because at the time we were insolvent. I cannot remember the form to fill out but it was only a 5 minute call to find out if there was anything that could be done.
Reply
3-11-2010 @ 9:41AM
linda said...
go see a good accountant. If you owe more than you are worth you may not have to pay or not pay as much.
Reply
3-11-2010 @ 9:18AM
TONY said...
NO ONE TRUST THIS GOVERMENT NO MORE.
WHEN THE CITIZENS CONTROL THE GOVERMENT WITH THEIR VOTES, THIS IS DEMOCRACY; BUT WHEN THE GOVERMENT CONTROLS THEIR CITIZENS AND THEIR VOTES THIS IS PURE AND SIMPLE: COMMUNISM, TOTALITARISM OR MARXISM.
DEMOCRACY WAS GONE LONG TIME BACK IN THE U.S.A. TODAY WHAT WE HAVE IT IS A NEW WAY OF ABUSE AND TOTAL CONTROL BY OUR GOVERMENT
. TONY
Reply
3-11-2010 @ 10:57AM
alo said...
Tony not to mention that the rush with the approval of health care's plan is to put the hand on 3 billions since that money of the bailout is already gone..and take all of our assets
3-11-2010 @ 9:50AM
Jennifer said...
First - why would we trust information provided by the Federal Reserve Bank? They have reaped the highest profit of any private (yes, they are private, not a government agency) company EVER. And no one says anything about their bonuses, profit, etc.
Personally, I paid off nearly $10,000 in CC debt in the past 8 months, and paid off my car. If you watch/lsiten to Dave Ramsey or Suzy Ormann, you would know people are paying off their debt - in a recession. Millions of dollars are added up every Friday on Ramsey's radio show. I think this year alone it's up to $10 mil, just of those who have made it trough on the phone lines to say they have paid off all of their debt. And it's barely March.
Reply
3-11-2010 @ 9:29AM
Lita Epstein said...
Jane,
What Leslie says may be true for you. A special law was passed to provide special tax consideration on debt cancellation during 2007 to 2012. You can read more about the rules at http://www.irs.gov/individuals/article/0,,id=179414,00.html
Lita
Reply
3-11-2010 @ 10:10AM
brent ryder said...
I used my credit unwisely over the years but I woke up when the credit card companies put the screws to everyone even those of us who have had credit for 25+ years never missed a payment never late yet I was treated like others who default file bankruptcy whatever I hope all issuers of credit in the form of cards goes belly up
Reply
3-11-2010 @ 10:22AM
Jane said...
For leslie, linda and lita, Thanks so very much for the info, it's very helpful, I wouldn't know about it otherwise. I wrote it down and am including it with the rest of my things to go to get my taxes figured. I always go to the same lady at H&R. She's always up on the newest things and even teaches it. I don't trust anyone but her. I'm sure she can help me with this info and take care of it. She may even have the forms there. I hope so because everything left me broke.
Reply
3-11-2010 @ 10:58AM
FOXYLYNX said...
Tony, I agree w/you 100% - they manipulate the states and the votes - I say let the popular vote rule - that is democracy. We need term and age limits and campaign finance reform - that is the only hope we have. I don't trust anyone in the gov anymore - they are all leeches out for themselves on our backs.
Reply
3-11-2010 @ 11:03AM
Bill said...
It all boils down to two things:
Don't spend money you don't have, and don't buy things you don't need on credit--wait until you have the cash for them.
Also, how about rewarding those of us who pay our whole balance or a large amount of it by lower interest rates, the credit card companies aren't making that much off of us anyway.
Reply
3-11-2010 @ 11:22AM
ken said...
maybe if the credit card companies wouldnt outsource their services to offshore latin American companies...maybe if the real owners of this country would bring the jobs nack fron China...people could afford to pay bills...credit cards are the first to NOT get paid...bussiness in this country want us to pay,,,yet they dont want to pay us to work,,,they can kiss my arse...lol
Reply
3-11-2010 @ 11:39AM
gs said...
without credit the standard of living will decline to levels almost unimaginable - think prefire - forgiven debt is not taxable if you are insolvent - if you cannot make your payments then you are insolvent - if you have defaulted on any debt your credit is trash -take you card payments and give them to a lawyer and get your bailout - its called chapter 7
Reply
3-11-2010 @ 11:55AM
Joseph Harrison said...
I don't understand why someone would run up credit card debt and then not pay the bill. You knew what you were doing when you were spending. Did you not think you would have to pay it back? We have gone off the deep end some how. Now I am asked to bail out all these losers because I am responsible with my money. Why are we such a nanny state. Wake up people.
Reply
3-11-2010 @ 3:51PM
Momma Bear said...
Food is a good reason Mr.! I did not want to use food stamps or welfare. I am applying tomorrow for food stamps. So sad.
3-11-2010 @ 7:34PM
what2do said...
Heaven help you Joseph. I was always so proud because I went
over 36 years with NEVER being late on a payment, of any kind, be it loan, credit card, personal loan, etc., and am still current on my debts to this day. But..my husband and myself are now both unemployed...due to no fault of our own, and are now practically living off of credit cards. If miracles dont happen for us, we will be at the end of the road and have to keep using credit cards to get us by....hopefully this will never happen to you....you should never put people down to make yourself feel so magnificent...Even when I was able to pay full balances on cc's, I felt blessed to be able to do, I never once felt I had the right to put anyone down for not doing the same....YOU are the loser if you ask me....try getting down off the high horse you are on and open your eyes to the life changing predicaments so many people are facing in this country! You sound like the former P. Bush when he announced in a speach that "everyone knows how much money they have in the bank, They can balance their checkbooks!" (with a smurk on his face!),..this he said after the outrageous rise in gas prices and the over the top food prices, and thousands of jobs being lost!! I wonder ... would you call a man who lost his job of 25 years, 3 children to feed, and had to decided to feed his family, OR pay a cc payment, or try to put gas in his car to go look for a job, a loser? Many 'LOSERS' were once 'responsible with their money' until their hands got tied in one or many ways and they have no money to be responsible with now. You keep being responsible with your money Joe, hopefully you wont have to find out the hard way that Losers arent always Losers by choice! Why dont you take some of your well taken care of money and give some to a family that has no food on the table tonight? There are plenty out there, maybe one of your neighbors!! I'm sure you would look the other way!
3-11-2010 @ 11:55AM
asswipegwb said...
ya know I'm reading about some of these personal accounting stories gone from bad to good - and I can tell ya that in 2003 I had already been thru all that , owed over 16,000 and paid it all off in 9 months and the feeling was great , but once 2005 came around , I started using credit to run my business and it went great for 3 years until those pesky home loans began to defer and brought the whole system down - I blame the banking industry ( but not all banks ) and the feds for all of this for one the banks did nothing but get the feds to change the laws ( bankruptcy) to favor them and I blame the feds for not taking issue with the banking industry's habits back in 2002 when congress had an opportunity to stop the practices of home mortgage loans - now I can't get a home mortgage loan , the American dream is gone ( has been for years ) and people like me ( 53 years old ) are left out in the cold because of the greed of these idiots - I filed for bankruptcy last year , I paid my debts on time until September 08 , when I realized that without work I needed to survive - I'm glad that at least someone in the industry is taking issue with the problems they helped to create - now what I'd like to see is someone burn for this huge mess , that could have easily been avoided !!
Reply
3-11-2010 @ 12:00PM
BILLY112140 said...
TONY, you make the same mistakes in why we are in such deep trouble. PPL. ( voters ) are the ones who have allowed the corruption in our gov. When we the ppl. only have a 50% turnout,
surely you must see that it is our fault that this mess has happened. We have a country that with only 50% participation
( dems. repubs & independants ) in the voting process, how can ppl. make a diff? If we look at the actual turnout, its a very small
number of ppl. who are actually trying to make a diff. in our gov.
Im sick and tired of hearing Americans putting the blame on everything but where it rightly belongs , and that is on ourselves.
We are a politically uneducated and ignorant ppl. when it comes to politics. We are such a laughing stock in the world.
Reply