Credit Card Debt Is Actually Rising

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The one silver lining of our otherwise dismal economy was supposed to be that consumers had finally learned to spend more wisely and reduce their debts.

One study released last month from TransUnion buoyed this belief with findings that individual credit card debt fell by 13% in the second quarter of this year, reaching its lowest level since 2002. This was all the more surprising because another report found that credit card spending had actually increased 6% during the first half of the year.

How could Americans simultaneously charge more purchases and pay down their credit card debts? The answer is simple: They can’t.

CardHub, an online credit card comparison guide, analyzed data from the Federal Reserve and found that previous studies had failed to factor in the increasing rate of credit card charge-offs, which occur when the debt is deemed as uncollectible by the creditor.

Credit card debt decreased by about $12 billion in the second quarter of 2010, compared to the previous quarter. However, the charge-off rate over the same time period increased to 10.8% or $21.8 billion. With this data included, CardHub reports that the total consumer credit card debt in this country actually increased by $9.7 billion.

“What we are seeing is that consumers are charging off their debt in record numbers, and the consumers who are not charging off their debt are accumulating more,” said Odysseas Papadimitriou, CEO and founder of CardHub.

Charge-offs generally occur when consumers fail to pay off their credit card debt after 180 days. The creditor reports this debt as a loss on their tax returns and the consumer gains a giant red flag on their credit report.

“Consumers are under enormous stress and charging off at record numbers. As a result, they have their credits ruined in the process and have collectors go after them,” Papadimitriou said. “It’s definitely not a healthy sign” for the well-being of consumers or the economy.

In fact, the problem of credit card debt may only get worse in the coming months.

CardHub estimates that outstanding credit card debt will only continue to increase throughout the remainder of the year, with consumers accumulating at least $26.2 billion more in debt in 2010 compared to last year.

“Last year, consumers only had an actual pay down only in the first quarter of 2009, when they received tax refunds and bonuses, and the holiday spending season was over. In the subsequent quarters, they just accumulated more and more debt. The same trend is happening this year,” Papadimitriou said.

That said, there may be some hope for improvement. The most recent Credit Card Indices Report found that charge-off rates declined to 9.3% in July, dropping below the 10% mark for the first time in more than a year.

As for the many consumers who are dealing with a charge-off and staring at a bad credit score, the trick, according to Papadimitriou, is to be active and work to repair your credit.

“When a lot of consumers get in trouble, see their credit score is ruined and their FICO score going down the drain, they give up and say what can I do? And they think that time going by is going to fix things,” he said. “But my advice is that when you have a bunch of bad information on your credit report, you need to start putting back as much positive information on your report as possible to dilute the negative.”

One tip he recommends simply opening a secured credit card. Whether or not you use it, just having one open is enough to begin demonstrating to the three major credit bureaus that you are in good standing.

Credit score in the gutter? You can still get a card. Read this MainStreet article to learn what to do.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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