For months, consumer advocates have been cheered by Federal Reserve statistics showing that people are steadily paying down billions of dollars on their combined revolving debt, which includes credit cards.
At the end of 2008, people owed a combined $958 billion in revolving debt. Since then, that figure has fallen to $864.4 billion as of the end of January. The steepest decline came in November, when consumer credit fell at an annualized 18.5 percent rate, while January saw the slowest drop in recent memory with just a 2.3 percent annualized drop.
However, a recent USA Today article quoted Odysseas Papadimitriou, CEO of CardHub.com, as estimating that 90 percent of this decline has been due to credit card company charge offs. In turn, he has reportedly determined that only about $10 billion in lower debts can be traced to consumers actually paying down their balances, and much of this may have taken place early last year.
USA Today also noted that the average American household has nine credit cards.
The report brings to mind a debate among economists that flared during the recession about whether people were permanently changing their spending habits and becoming more responsible, or whether lenders were simply making credit tougher for most people to get. Instead, it may be that neither answer is completely correct.
With a charge off, a credit card company has essentially given up on the likelihood of ever collecting a specific debt. However, a consumer is still liable for that debt, and will suffer damage to their credit score because of it. Some cardholders have also been subject to lawsuits for not paying their debts, while many others can expect to hear from collections agencies if one of their accounts is charged off.
Driven by a high unemployment rate, many of the nation's leading credit card companies have reported charge off rates in the 10 percent neighborhood for much of the recession. Unemployment has also been a factor in other negative financial indicators, such as foreclosures and credit card accounts that are 30 or 60 days past due.
When checking one's credit report, a factor like payment history accounts for about 30 percent of the formula used to calculate a credit score. Other factors include the size of one's existing balances and the length of the credit history in question.