We had a lot of interest in our article on credit card debt statistics, so we thought it would be helpful to take a more in-depth look at credit card debt. Traditionally, there has been a lot of debate around credit cards and whether or not this debt contributes to economic instability and consumer bankruptcies.
In this publication, we're going to discuss several published statistics on the use of credit and credit cards. Next, we'll talk about the Federal Reserve's viewpoint on debt, and whether or not individuals in charge of monetary policy had any concerns about credit card debt. We'll finish up by taking a look at a study examining the link between credit card debt and bankruptcy.
Credit Card Debt Statistics
In December of 2010, the Federal Reserve released its latest set of statistics on consumer credit and debt. That report tells us that as of October 2010, Americans held 2.4 trillion dollars in consumer debt. This is a pretty large number considering it does not include loans secured by real estate such as a mortgage.
The report further breaks down consumer debt into revolving and non-revolving credit. Revolving lines of credit consist primarily of credit card debt when referencing consumers. This credit is available to consumers when they need it, and the exact purpose is not identified. Non-revolving credit can range from automobile loans through student loans. This is credit extended to consumers for a specific purpose.
Now to some, 2.4 trillion dollars may sound like a lot of money. Others might dismiss this number, thinking that many Americans make a lot of money and that much debt is really not a big deal. Let's look at this number relative to disposable income, which is the amount left over from your paycheck after you've paid all your monthly bills.
Back in the 1980's, consumer debt stood at roughly 65% of disposable income. In the 1990s, consumer debt stood at roughly 85% of disposable income. Today, this kind of debt stands at 110% of disposable income.
So to put things into perspective, consumer debt has roughly doubled with respect to the money a consumer could use to pay down that debt. Said another way, it would take consumers today twice as long to pay off this kind of debt than it would have only 20 years ago.
Growing Use of Credit Cards
Maybe you've heard the term «statistics can be misleading» before, and that term does apply here too. While there is no doubt that Americans are running up more debt than ever on their credit cards, we also need to keep in perspective how consumers use their credit cards.
Credit cards are now a convenience tool we use to pay for goods and services. Gone are the days of paying cash at the grocery store. It's faster to hand the cashier a credit or debit card. Credit cards are convenient to use, and rewards programs encourage cardholders to use their credit card to pay for more items than ever before.
Credit Card Statistics
According to the latest information gathered by the U.S. Census bureau, there were 173 million credit card holders in the United States in 2006, and that number is projected to grow to 181 million Americans by the end of 2010. In addition, these same Americans own approximately 1.5 billion cards. That's an average of nearly nine credit cards issued per credit card holder.
In addition, Americans charged approximately 1,950 billion dollars to their credit cards in 2006. That's just over $11,200 in annual charges. This information includes all credit card types including bank cards, phone cards, as well as credit cards issued by oil companies and retail stores.
Concern over Debt
So should there really be any concern over this growing credit card debt? Alan Greenspan was the Chairman of the Federal Reserve Board. In that role, he was a very important person because he determined if interest rates were too high or if consumer credit was a concern. In October 2004, Mr. Greenspan had the following thoughts on consumer credit:
«To be sure, some households are stretched to their limits. The persistently elevated bankruptcy rate remains a concern, as it indicates pockets of distress in the household sector. But the vast majority appear able to calibrate their borrowing and spending to minimize financial difficulties. Thus, short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing».
The above statement indicates that the Federal Reserve was not particularly concerned over consumer debt. But why was that true?
Debt Payments and Household Income
Mr. Greenspan points to the debt service ratio, which is a ratio of debt payments to disposable income. This ratio includes payment on all debt, including mortgages, and he rightly points out that this indicator has not risen dramatically over the past 10 years. This means the Fed acknowledges that the use of credit cards has increased over the years, but it's stabilized and was not a concern.
Another factor the Fed points to is the ratio of a household's net worth to income, which was around a factor of five. This means that a household with $100,000 in annual income has a net worth of $500,000. When Alan Greenspan made his comments, that ratio was near a historical high, which was very good news. It meant that if necessary, households had assets they could sell to pay down their debt.
If you read the last sentence of the quotation above, you can see where the real concern was for the Fed:
«Thus, short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing».
They were not worried about debt because homeowners are using credit cards in different ways, and they had a lot of assets they can use to pay off debt. But much of that net worth came from the increase in home values. The Fed was warning us by stating that as long as the housing bubble does not break, we're okay. But if home values decline, debt would be more of a problem. That's exactly what happened to start the Great Recession.
Credit Cards and Bankruptcy
Even Alan Greenspan admitted that the elevated bankruptcy rate was a concern. However, he saw the problem as «pockets of distress», and not a widespread problem.
In 2000, the Department of Justice conducted a study that examined the link between bankruptcy filings and credit card debt. This study examined 1,000 bankruptcy cases, and found the following relationship in this population:
Credit Card Debt % of Bankruptcy Cases
$0 13.5%
$1 - $9,999 36.0%
$10,000 - $24,999 26.4%
$25,000 - $49,999 16.7%
$50,000 - $74,999 4.3%
$75,000 or more 3.0%
The above table tells us that 50.4% of the households filing for bankruptcy had credit card debt in excess of $10,000. Of greater concern were households, 30 of them, that reported at least $75,000 in credit card debt. Among this group, the average number of credit cards owned was 16.7, ranging from a low of eight to a high of 33 cards. The average balance on each account was nearly $6,400.
The researchers conducting this study felt very strongly that there was a relationship between credit card debt and bankruptcy. Clearly the Fed also acknowledges that credit cards are adding to financial stress and they are keeping an eye on the growth of debt, household income, and home values, because they are all interrelated.
We hope this article gives you a little more insight into credit card statistics. We thought that it would be useful here to not only share statistics, but also provide you with a practical example of how they are used by some very important people to make some very important decisions.
Money-Zine.com
