Credit-Card Debt Are Worse Than What It Seems

Recently it was announced by the Federal Reserve that Americans have cut down their rotating consumer credit, which are typically balances on the card by almost $7.4 billion in the month of May. It is not a one-off but an annualized rate of 10.5 percent. According to the Fed from 2008 end individuals have cut the balances by almost 13% or $127 billion. These headlines generally are very reassuring.

When people clear off their debts, it is expected that the delinquency rates will fall. That is the reason why the American Bankers Association declared that the card percentage with payments which were over 30 days late declined in the first quarter of the year to levels lowest since 2002. It had even gone down below the 15-year averages. According to ABA`s chief economist, James Chessen it is very obvious that there is an improvement in the consumer balance sheets. He feels that there is less borrowing by people and they are saving more cash to build wealth. All these are no doubt positive signs. This does sound like good news.

The reason why there is a decline in the credit-card balance is not that individuals are paying off their credit with extra earnings and spare cash. The key reason for this positive phenomenon is that the banks have been writing off the credit when small borrowers default. This surely decreases the balances, but in a very different way.

According to the Fed in the first quarter of 2011, the balances on credit-card fell by almost $19.5 billion. Here one needs to see the amount of credit which was written off. According to data available from the Federal Deposit Insurance Corp, the amount was around $18.7 billion.

It has been seen by the data from the American Bankers Association that a smaller percentage of credit cards still have over dues, there is an increase in the average sum owed on those cards. Mr. Chessen explains that this suggests that less number of people are facing problems, but those who are, have bigger unpaid balances.

People are doing whatever they can to ensure minimum payment on their credit cards every month to keep the cards active as this is their final cash lifeline.

Bryant Park

Bryant Park is a financial consultant for one of the companies listed on Wall Street. He writes on a variety of topics ranging from credit cards to different loans that can be availed by consumers. He holds a bachelor degree in Financial Services from Dartmouth College.