Debt charge-offs not consumer payoffs reducing credit card debt

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credit card debtWe'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:
  1. 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.
  2. Record unemployment rates, which means fewer consumers can afford to pay down debt.
  3. 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."
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