Credit Card Debt Shrinks as Consumers Still Reel From Shaky Economy

It's not clear that the economic rebound is trickling down to everyone's pocket book, but the recession has definitely forced more people to pare down the amount they owe on their credit cards and to pay bills on time.It's not clear that the economic rebound is trickling down to everyone's pocket book, but the recession has definitely forced more people to pare down the amount they owe on their credit cards and to pay bills on time.

In a report released this week, the national average of credit card borrower debt decreased by about 5% for the first quarter to $5,165, from $5,434 in the previous quarter. The amount of debt has been slowly shrinking since the beginning of 2009, dropping about 10% from a year ago when it stood at $5,776.

Consumers Holding Off on New Cars and Flat Screens

TransUnion's report -- based on 27 million anonymous, randomly sampled credit files -- also shows the delinquency rate is declining and is expected to drop to less than 1% by the end of the year.

Economists say the reversing trend of people no longer running up consumer debt may have a short-term downside to the struggling economy, but it makes long-term sense and is ultimately better for the health of the economy.

"We've come a long way from 2005 when everyone was buying a new car and a flat-screen television," said Polina Vlasenko, a research fellow at the American Institute of Economic Research. "Consumers have learned that things can go wrong -- like they may lose their jobs and it may take them six to eight months to find a new one."

Vlasenko says tax rebates and other incentives that have been floated in recent months don't make a dent in the overall health of the economy.

Banks Not as Easy-Going With Credit Cards

While consumers are cutting back, another big reason the debt levels are declining has to do with the banks tightening their lending rules. Free credit cards are no longer being sent to consumers whose monthly debt payments equal 60% of their income. The banks are more careful and don't want to end up holding the bag for those who can't pay off the debt, Vlasenko says.

With unemployment rates hovering near 10%, banks are right to be cautious. A Federal Reserve report last week estimated that 19 of the largest banks in the U.S. could expect $82 billion in credit card loses by the end of the year.

TransUnion's Ezra Becker, director of consulting and strategy, noted in the report that the national credit card delinquency rate, defined as being 90 days or more delinquent on one or more credit cards, is down 8.3% from the previous quarter. Year over year, credit card delinquencies fell by 15.9%.

"We see the effect of this conservative approach on delinquencies as well," Becker said. "Over the last 10 years, the first quarter has shown a reduction in credit card delinquency rates only three times, including the 2001 recession."

Alaska Tops Credit Card Debt List

The highest state average credit card debt remains Alaska, with $7,135 per person, followed by Tennessee with $6,688 and Alabama at $6,126. The lowest average credit card debt was found in Iowa with $3,872, followed by North Dakota with $4,144 and South Dakota at $4,218.

Scott Goldsmith, a business professor at the University of Alaska at Anchorage, gives several reasons why he believes his state has the dubious honor of having the highest consumer debt rate in the country. He says that Alaska's buffer from the downturn -- in the form of oil revenues shared with state residents -- has kept consumers confident and unfettered in their spending habits. Plus, the state's demographics show a younger population that needs to spend more fill their households with products.

"There's some cutting back here, but not nearly on the same scale as other parts of the country," Goldsmith says. "I'm not sure how long it will last, but people are still pretty confident here and feeling secure in their jobs."

Here's a state-by-state list of debt levels for the first quarter of 2010, courtesy of TransUnion.

Rank, State (including District of Columbia), average credit card debt
National average $5,165

1 Alaska $7,135
2 Tennessee $6,688
3 Alabama $6,126
4 Mississippi $5,850
5 Hawaii $5,831
6 Florida $5,773
7 Georgia $5,759
8 North Carolina $5,719
9 Nevada $5,635
10 Colorado $5,610
11 South Carolina $5,549
12 Washington $5,432
13 Montana $5,405
14 Connecticut $5,321
15 Arizona $5,320
16 New Jersey $5,305
17 California $5,299
18 Virginia $5,283
19 Delaware $5,283
20 Texas $5,265
21 Maryland $5,205
22 New Hampshire $5,201
23 Idaho $5,144
24 Massachusetts $5,043
25 New York $4,986
26 Louisiana $4,974
27 Oregon $4,935
28 District of Columbia $4,911
29 Illinois $4,903
30 Wyoming $4,897
31 Missouri $4,897
32 Rhode Island $4,891
33 Ohio $4,890
34 Utah $4,876
35 Arkansas $4,867
36 New Mexico $4,858
37 Michigan $4,797
38 Kansas $4,791
39 Indiana $4,734
40 Oklahoma $4,688
41 Minnesota $4,677
42 Maine $4,666
43 Kentucky $4,538
44 Pennsylvania $4,494
45 Vermont $4,390
46 Nebraska $4,335
47 Wisconsin $4,248
48 West Virginia $4,240
49 South Dakota $4,218
50 North Dakota $4,144
51 Iowa $3,872
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