October 9, 2010
How Is Debt Going Away... Revisited
Since I took the time to argue, last month, that the slow pace of paying down debt, as compared with giving banks no choice but to write it off, means that a whole lot of debt has to be paid down to balance out each default. Michelle Singletary would say that I'm being too charitable:
CardHub's analysis found that credit card debt for the second quarter of this year decreased by about $12 billion compared with the previous quarter. But banks charged off $21.8 billion during the same period. Given that the drop in outstanding debt is smaller than the dollar amount that was charged off, the difference of $9.8 billion is the amount of debt consumers accumulated, Papadimitriou said.His findings give a more realistic view of how seriously the recession has crippled consumers. The charge-offs also indicate that many banks are continuing to experience deep losses, and this is one of the reasons why credit is still tight. It's why many lenders have been cutting people's credit limits, he said.
The Wall Street Journal analysis that I cited in the first link, above, found that some debt was indeed being paid down. The difference between that and CardHub's numbers appears to be that the former is all debt, while the latter is credit card debt. That could mean, in other words, that folks are paying off longer-term debt while still living off of their credit cards.
Whatever the case, Americans still have much work to do breaking their addiction to swiping plastic.
So it seems that you guys have receivesd some of that undocumented money from unknown sources. Good for you.
Posted by: David S at October 9, 2010 9:39 PMJustin writes:
"That could mean, in other words, that folks are paying off longer-term debt while still living off of their credit cards. "
That is a commonplace. Another frequent occurrence that few seem to know about is frequently obtaining new cards and using "cash withdrawals" to make minimum payments on previously outstanding card balances. Little noted in the news is what percentage of people file bankruptcy with previously "excellent credit".
Lenders known this, but seldom talk about it. I have wondered why people hate lawyers, but respect bankers.
Speaking of bankers, has anyone else noticed their re-entry into "small loans", or "pay day loans"? They are preferring to call this "over draft protection". Those who will talk to me about it, admit that it is terrific business to loan you $100 and charge a $35.00 "service fee". Even better is when you are unaware of the overdraft and make, lets say, 10 $8.00 "overdrafts" with your debit card. They get to hit you for $350 in "fees".
Congress took note of this and began to regulate it a bit. Bankers, not being stupid, now get you sign up for "overdraft protection". You have agreed to the fees. Note that the "overdraft protection" goes up to $2,000. What they are hoping is that you will write yourself a small loan. For instance, "overdraw" to buy a new TV. They whack you $35.00, then outrageous interest. Meanwhile, unlike the credit card companies, they can "peek" at your account and keep track of your prospects.
Bankers don't like to talk about the money they make on "small loans", and tend to keep it quiet. At one time J.P. Morgan Co. owned much of Household Finance, but none in the U.S. Who knew?
Posted by: Warrington Faust at October 9, 2010 9:48 PMAnother thought, if you owe money to the bank which has your checking acoount, if you fall behind on your payments to them they can "offset" it against our account. This could cause your mortgage payment to another bank to bounce.
Posted by: Warrington Faust at October 9, 2010 9:54 PM