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Credit Card Debt Daunting Despite April Pay Down

The Exchange

Debt is on everyone's mind. Whether it's student loans, mortgages, credit card debt, or the national debt, the amount and the consequences have stirred a frenzy of fear and ire. Consumers struggling with unsustainable debt levels clearly can't be long-term drivers of spending, a key component to our economic recovery. In short, the sooner they pay down excessive debt, the sooner healthy (and, let's hope, responsible) spending will pick up.

The perhaps-surprising good news: "Domestic — public and private — debt as a share of the economy has declined for 12 quarters in a row after surging over the previous decade," writes MarketWatch columnist Rex Nutting, who points out that U.S. household debt has fallen to 84% of GDP from a peak of 98%.

The Federal Reserve said last Thursday that the growth of consumer debt slowed in April, and that revolving credit, which includes credit-card debt, decreased by $3.44 billion in April to $862.29 billion.  Credit card debt has ballooned into a daunting cloud over consumers over the past several years.

The Bad News

The bad news is that decreases in revolving debt likely won't last through the rest of the second quarter, according to a study from CardHub.com that warns the overall trend in credit card debt might not be so positive. The early numbers each year look good — outstanding credit card debt decreased by $44.6 billion during the first quarter of 2012 relative to the fourth quarter of 2011. But such a decrease is apparently normal for the first quarter, when bonuses and tax returns are often put to such use.

According to the study, it appears that 2012 will mark the fourth straight year that the first quarter is the only quarter in which consumers pay down credit card debt.

According to the report:

"Dating back nine quarters, U.S. consumer debt management has consistently worsened, with the exception of this quarter and Q3 2010. In other words, our first-quarter pay-downs have become less significant and the amount of new debt added in each subsequent quarter has grown compared to its respective counterparts in the previous two-plus years."

Most of us haven't realized the reality that we can't continue to spend recklessly, says Card Hub CEO Odysseas Papadimitriou. "The problem is that we see signs of the nation's economy recovering and think we can return to pre-recession spending levels," he says.  "Unfortunately, pre-recession spending was inextricably tied to the housing bubble, and without another one we cannot turn back the clock."

As MarketWatch's Nutting notes, a McKinsey study published earlier this year determined U.S. households may have two more years of deleveraging left before they have sustainable debt levels again. Therein lies the problem, at least when it comes to credit cards -- are people really deleveraging to sustainable debt levels?

Deleveraging, of course, means people are choosing to divert funds from spending, which is a limiting (but many would argue necessary and healthy in the long term) factor for growth.