The jig is up and so are American credit card debt levels. Between July to September 2012, the credit card debt per borrower was 4.9% higher than from a year earlier. Low interest rates keep consumers borrowing, which then in turn enables Americans to start carrying higher balances on their credit cards. It should be noted that this is a practice that can be very dangerous. Some professionals suggest that the increase in balances could be seasonal and be affected by common expenses such as back to school shopping and summer vacations which may lead to these higher balances. However, there may be a number of other reasons for this increase in credit card debt across the nation.
Banks Aren't Helping
Banks and lenders have been steadily increasing the amount of credit cards they issue. In the second quarter of 2012 banks issued 3.1% more credit cards than in 2011's second quarter, and about 25% of these issuances went to higher risk consumers with nonprime credit scores. Nonprime credit scores are those below 700. That number jumped to nearly 30% in the third quarter. This shows that many financial institutions are lowering their standards for borrowing qualifications and are lending to people who are prone to making major credit card mistakes.
On another note, the number of credit card payments overdue by at least 90 days is at 0.75%, which is up from 0.71% in last year's third quarter. The all-time low of 0.56% occurred in the mid-1990s. Unfortunately, this number may only continue to increase since banks are open to lending to more risky clients, but only time will tell.
Credit Card Debt Levels
As of Septmeber 2012, the total credit card debt in America stood at a whopping $852 billion. This is up more than 6% from September 2011. For the households that have debt, the average amount of credit card debt per household is $15,328. This makes credit card debt the third largest source of debt for households with debt. This is only behind student loans (an average of $34,703 per household) and mortgages (an average of $149,782 per household).
Some may argue that higher spending will put the economy on a positive track, and to an extent this is true, but consumers shouldn't sacrifice their wealth just for the economy. Higher debt levels means more interest paid, which diverts the cash flows from more useful forms. By decreasing the amount of credit card debt, Americans may be able to build a more sustainable plan for their retirement and future plans. Another possible reason there is an increased amount of spending could be attributed to more confidence in the United States. In October alone, 171,000 jobs were added to the U.S. economy. This has led to more consumers having a greater amount of disposable income.
All of this aside, Americans are definitely less dependent on their credit cards than they were in 2008 during the financial crisis. Americans are taking one step forward and two steps back when it comes to credit card debt, but at least things are headed in the right direction.
The Bottom Line
Credit card debt has been growing siginficantly, and this could be due to many different factors. While some think that increase spending stimulates the economy, it could ultimately have a negative effect in the long term. Instead of consumers putting more money into retirement, their cash is going to interest payments, and this only hurts their financial future in the long run. Consumers should focus on paying down credit card debt instead of increasing their spending. Bringing down the amount of overall debt in our nation should be our number one concern.
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