The recently released Federal Reserve G.19 Report has sparked a flurry of news stories proclaiming that consumer credit card debt is on the rise for the first time in 27 months. Such news has been met with surprise over the fact that debt levels would begin to worsen so soon after the country emerged from the Great Recession and prognostication about exactly what this trend signifies. However, a closer look at America’s credit card debt over the supposed 27-month stagnant period shows that this is, in fact, not the first time consumer credit card debt has risen since 2008.
According to quarterly debt studies conducted by WalletHub.com, consumer credit card debt also rose in the second, third and fourth quarters of 2009 as well as the second and third quarters of 2010. A similar result is also expected from WalletHub’s Q4 2010 Debt Study, which will be released next week.
The disparity between WalletHub’s finding and the widely-publicized reports of newly-rising credit card debt lies with the scope of data used. Many reports do not include charged-off debt—debt that credit card companies are required by law to write off their books because it is 180 days delinquent. However, debt does not disappear simply because it has been charged-off. Consumers are still liable for it and credit card companies will usually continue efforts to collect it. The only difference between charged-off and less-delinquent debt is that the former is no longer considered part of a bank’s outstanding credit card balances.
Thus, failing to account for it is effectively ignoring some of the nation’s most serious debt and naturally leads to a considerably distorted picture of debt in the United States. When charged-off debt is included in quarterly debt figures, it quickly becomes apparent that the G.19 report merely marks an increase in a somewhat consistent rise in credit card debt, not the first increase in over two years.
“The idea that the G.19 Report findings represent the first increase in credit card debt in 27 months is a dangerous one,” said Odysseas Papadimitriou, WalletHub’s CEO and a former senior director of Capital One’s credit card division. “Ignoring charged-off debt merely creates a misleading image of America’s financial well-being which leads to a false sense of financial security. While this may have calmed fears following the Great Recession, it also helped lead to a sort of consumer spending hubris.”
According to Papadimitriou, the increase in credit card debt displayed by the G.19 Report occurred partly as a result of many consumers allowing spending to return to pre-recession levels. Papadimitriou believes that a significant group of consumers whose spending was tied to the housing bubble, either directly or directly, have yet to come to terms with the fact that even after this recession is over, their spending cannot revert back to where it was a few years ago.
In actuality, however, credit card debt has been climbing with some consistency for over a year, and the G.19 Report merely represents the worsening of a trend rather than a break in a pattern.