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Credit Card Debt Is Declining – Hooray?

November 25, 2013
Credit Card Basics, Credit Cards, Credit Score
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It seems like we’re never hearing any positive economic news these days, so it seemed like a welcome surprise that credit card debt declined again in September, according to data from the Federal Reserve. What’s more, this was the fourth month in a row that credit card debt fell. Great news, right?

Maybe, but maybe not. On the one hand, a drop in credit card debt is good for individuals, who will likely see improvements to their personal finances as a result of cutting back on their spending. But on the other hand, falling credit card debt levels may indicate continued problems in the overall economy. Let’s take a closer look at the numbers and what they mean:

Credit Card Debt Falls In 2013

The first important thing to mention is that, in the third quarter of 2013, credit card debt has been decreasing. In September, total unpaid balances on credit cards dropped by $2.06 billion, which followed a whole summer of dropping debt. Between June and September, the total amount of credit card debt owed by Americans dropped by $8.48 billion.

Strangely, though, other types of debt have actually increased this year. So-called ‘non-revolving’ debt – think car loans and student loans – has risen by 8.7% so far in 2013, and is expected to go up even more by the end of the year.

» MORE: How to pay off debt

What the numbers mean

Looking at statistics related to debt and spending is well and good, but it’s also helpful to try to figure out what the numbers mean. So how should we interpret falling credit card debt totals, while other types of debt continue to rise?

Economists believe that the drop in credit card debt in 2013 probably isn’t due to a sudden wave of responsibility sweeping the nation. It’s much more likely that a variety of economic factors are coming together to make Americans less excited about spending money, factors such as:

  • A high unemployment rate (7.3% in October 2013)
  • Small increases in wages
  • Political uncertainty (debt limit debates, government shutdown, etc.)

All this means that people aren’t willing to spend beyond what they have to on day-to-day items, causing credit card debt levels fall. But big-ticket purchases like a car or a college tuition bill are necessities that a lot of people put off as long as they could while the recession was in full force, which accounts for recent increased borrowing in those areas.

Is it a problem that people are spending less on everyday items, but more on other things? Eventually, it could be. The U.S. economy depends heavily on consumer spending, so if Americans aren’t buying as much stuff on a regular basis, economic growth could be affected. At the same time, if consumers keep spending more on cars and college, personal debt levels could rise too much, putting individuals at financial risk.

Did the CARD Act work?

It might seem obvious that a drop in credit card debt levels means that the CARD Act of 2009 worked. After all, the law was meant to prevent people from getting into trouble with credit cards, right?

Not exactly. Mostly, the CARD Act was intended to prevent Americans from being overcharged in fees. From this perspective, the CARD Act has been effective. New data shows that it has saved consumers $20 billion per year since 2009. But the act wasn’t designed to keep us out of debt; in fact, no part of the law regulates any aspect of consumer debt levels.

This means that recent reductions in credit card debt probably aren’t due to the CARD Act.

The bottom line: although falling credit card debt levels in the U.S. might seem like a good thing, only time will tell if this news is good or bad for the overall economy.