Americans facing bitter medicine of credit contraction

A new report shows that the amount of credit available to Americans is still contracting, but in light of some other recent data showing that we still haven't shaken our addiction to spending, this seemingly bad news might be a blessing in disguise.

Federal Reserve data shows that between October and November, the amount of debt held by Americans dropped by $17.5 billion. Analysts only expected that amount to drop by around $4 billion, according to economists cited in this MarketWatch article.

The decrease is significant not only in its size but because it was so unexpected. Most of the drop came from a decrease in credit card debt, which fell by $13.7 billion -- an annualized drop of 18.5%.

This marks the 14th straight month Americans' collective credit card debt has dropped. Overall, credit has dropped in all but one month since the financial crisis struck two Septembers ago.

There are probably a few factors impacting this large drop. First, it's likely that more Americans are paying down their debt. Another possibility is that credit card companies have accelerated their debt write-offs, chalking up the outstanding balance as lost and selling those accounts for pennies on the dollar to collection agencies. Finally, a third consideration is that credit-card companies are reducing consumers' lines of credit.

This last prospect is what bothers people most; we hear from readers like you who have had their credit limits slashed, sometimes significantly, regardless of their accounts' standing. If one or more credit limits are dropped considerably, this can hurt your credit score, since lower limits raise what experts call your "utilization ratio."

But there is a silver lining to this drop in our debt, says Kathleen Day, spokeswoman for the Center for Responsible Lending. "This should remind the public and lenders alike that blindly handing out credit is in no one's interest. It doesn't help anybody in the long run," she told Walletpop in an interview. "Giving people credit they can't afford to replay is not a good business model."

It's a lesson we need to learn, but unfortunately, we're not quite there yet. Despite this large drop in available credit, spending over the holidays rose anyway.

In addition, the credit-card chargeoff rate is over 10% and still climbing. This information indicates that we still haven't mastered our addiction to buying and charging.
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