Credit Card Debt Going Down

The Federal Reserve says that credit card debt is going down. In a statistical release issued earlier this month it reported that American consumers paid down $6.9 billion in revolving debt (which is largely credit card debt) in October 2009 alone. From the end of August to the end of October, they paid down $14.9 billion. In fact, revolving consumer debt has been going down pretty consistently throughout the year.

Credit Card Debt, Going…um, Up?

And that’s confusing. According to figures recently released by Synovate, the market research arm of Aegis Group Plc, the average U.S. credit card balance actually went up–from $7,489 to $8,083–between the second and third quarters of 2009.

So how to square the two sets of figures? Well, it’s simple. Overall credit card debt is reducing. But there are fewer cards in circulation.

Credit Card Deals Generally Worse

Part of this reduction is due to consumers, some of whom have become fed up with credit card companies hiking rates, imposing new annual fees, and upping penalties. Many card holders have simply closed the less attractive of their accounts. But the credit card companies themselves have also been reducing the number of accounts that they regard as risky.

As Anuj Shahani, director of competitive tracking services for Synovate’s Financial Services Group, remarked: “A significant proportion of credit card accounts are being closed, either by issuers or by the consumers themselves due to the change in terms proposed by issuers.”

A Blow to Many a Credit Score

Mr Shahani continued:

This was inconsequential initially as issuers were mainly cutting lines on inactive accounts or for transactors, people who pay their balance in full each month. Recently, we are seeing many issuers reduce credit lines on active accounts or for revolvers, people who do carry a balance each month. This can put many households in a risky situation.

Synovate gives an example of just how damaging this can be. Supposing a household had a $25,000 limit across all its cards, but an issuer cancelled an account with a $10,000 limit. If the household had total balances of $5,000, then that would mean that its “utilization ratio” (the proportion of its available credit that it actually uses) would leap from 20 percent to 33 percent.

And that would affect the family’s credit score because lenders regard any utilization ratio over 30 percent as a red flag.

A Common Scenario

Credit card limits have been dropping all year, partly as a reaction to the credit crunch, and partly because card issuers are worried about how the Credit CARD Act of 2009 (a piece of credit card regulation that will fully come into force on February 22) will affect their profitability.

Indeed, the average American household had five percent shaved off its total credit card limits just during the period between the second and third quarters of this year. That was a drop to $26,657 from $28,005. And, if that was the average, then many individual families must have fared very badly indeed.

Published 12/17/09 (Modified 04/23/12)