Lower Credit Card Debt, But More Than Meets The Eye

The story from the Chicago Tribune seems to say it all, “TransUnion: Consumers paying down credit cards.” If true, that is great news that continues to follow previous trends. Unfortunately, I can think of several reasons why this result may not reflect positive developments.

Let’s Take A Closer Look

The story begins “Consumers spent $72 billion more paying down their credit cards than making actual purchases in 2009 and 2010, according to a new study from Chicago-based TransUnion.” This sounds great, but are there other explanations than simply concluding that consumers are paying down their credit cards. From my perspective, credit card debt is the portion of your balance that is not paid by the due date. If that amount is greater than zero, you have credit card debt. This is not how credit agencies like TransUnion view the subject. For example, I have never paid interest on my credit cards by always paying my balance in full and on time every month. Nevertheless, I am always stunned to view my credit report that shows that I have hundreds or even thousands of dollars in credit card debt. Why? The amount shown is simply a reflection of all the purchases I have made since my last payment was received. Since I take full advantage of the 20 day grace period, there will always be 20-50 days worth of purchases listed on my credit report as “debt”.  To clear that debt, I would have to pay my statement in full on the closing date, nearly three weeks before the payment is due. Only then would I momentarily have no debt as far as the credit agencies see things.

What Could The Mean?

This report could simply indicate that more people are using debit cards and other methods of payment besides credit cards. This is a growing trend as people who have been burned by credit card debt are shying away from any possibility of re-incurring debt. Another factor could be reduced spending in general. This can be due to the slow economy or simply people’s instinct to save during difficulty times, both of which have been reported. Finally, people may have had their credit limit curtailed or may have even lost their ability to obtain a card all together. Bankruptcies, job losses, and foreclosures can all have this effect.

What Are The Results?

According to the article:

“Average credit card debt in the U.S. declined more than $600, from $5,776 to $5,165 from the first quarter of 2009 to the first quarter of 2010. In the first quarter of 2011, average credit card debt was $4,679, a 10-year low.” 

Regardless of what trends produced this result, this is bad news from the bank’s standpoint. Each dollar charged represents merchant fees that go right to their profits. More payments and less new charges also reduce debt and interest payments.

How Will Credit Card Issuers React?

They will probably react the same way any business that is loosing customers normally reacts. They will increase advertising to attract new users, and offer promotions to compete in a shrinking market. This explains the sign up bonus wars we have seen this year, with $1,000 statement credits from Capital One and 100,000 mile sign up bonuses from Chase. Seemingly gone are the days where a mere 25,000 miles would make people click on a credit card application. 50,000 or another amount worth at least two free airline tickets seems to be the norm. This is what we are seeing from most airline credit cards and other travel rewards products.

What Should You Do?

As always, you should never carry a balance from month to month. Once you overcome that threshold, you are free to reap ever increasing rewards from your credit cards. These rewards are now taking many forms. First you get a sign up bonus that can be worth hundreds, or in the case of the British Airways miles, thousands of dollars. Next, you are on tap for rewards for your spending. Finally, many cards are offering some great non-point/mile perks. These include travel insurance, purchase protection, and priority access to airlines, hotels, and rental card agencies.

I hope the news that “credit card debt” is down is truly reflective of positive changes in people’s behavior. Either way, this can only be a sign of an extended golden age for credit card rewards aficionados.