Personal finance experts like to draw the distinction between “good” and “bad” debt, but in 2010, they are wrong. There’s no such thing as good debt; there is bad and worse. And credit card debt falls into the “worse” category.
And just when we thought things were looking up (warning: put on your macroeconomics hats here, kiddies) — just when it seemed American consumers were paying off their credit card debt — along comes a CardHub.com study that suggests otherwise.
The survey reveals that in the second quarter of this year, the entire decrease in credit card debt was actually because of charge-offs, as opposed to consumers paying down their balances.
According to the report,
The impetus of this study was skepticism towards a feel-good trend that many personal finance experts have been drawing from the Federal Reserve’s monthly G.19 Consumer Credit Report, which showed data that made July 2010 the 23rd consecutive month that revolving consumer debt decreased.
The study focused on consumer debt data from the Federal Reserve’s G19 report, in conjunction with quarterly charge-off data, to determine how much of the decline in consumer debt is attributable to bad debt being written off the books.
It found that although revolving debt in the second quarter declined by $12 billion compared to the same period a year before, $21.8 billion was charged off in the same quarter.
In other words, not only is the decline in debt entirely due to charge-offs, but consumers actually accumulated an additional $9.8 billion in credit card debt in the second quarter.
The predictions for the balance of 2010 are dire:
Consumers will end up with more debt in 2010 than in 2009. Based on the most recent study, CardHub.com’s latest projection is that consumers will accumulate an additional $26.2 billion in credit card debt in 2010, relative to 2009.
This flies in the face of conventional wisdom about credit card debt. Personal finance experts believed a “new” kind of consumer was behind the decline in revolving debt: one focused on paying off credit card debt and equipped with the means to do so.
Not true. The study suggests a recession-crippled economy that continues to experience deep losses.
I would agree that the situation looks bleak. A double-dip recession isn’t out of the question at this point. As a contrarian by nature, I’ve never really agreed with the rest of my colleagues (about much of anything). So the results don’t surprise me.
What’s the takeaway for the consumer? Don’t pay off one credit card with another. Instead, retire the debt — and the credit card — for good.
If you can’t pay off your credit card every month, switch to a debit card and live within your means. Otherwise, this recession could just be the beginning of something much worse.