$123 billion in 19 Months: Credit Card Debt's Amazing Plummet

At the end of September 2008, in the midst of one of the most significant financial upheavals in American history, the Federal Reserve quietly reported in its monthly consumer credit report that total outstanding consumer credit card debt stood at $975.7 billion, an all-time record.

It’s been all downhill ever since.

The Fed reported Friday in its monthly report – also called the G.19 — total outstanding consumer credit card debt had fallen to $852.5 billion in March 2010, a drop of $123.2 billion, or 12.6 percent from the high in September 2008. The total revolving balance of credit card accounts has fallen every month since then.

According to revised Fed figures, consumer credit card debt fell 9.6 percent in 2009 alone. While the rate of decline seems to be weakening – preliminary figures indicate that revolving debt declined at a 6.2 percent annual rate in the first quarter of 2010 – banks and accounts receivable management companies should prepare for further drops.

A confluence of factors has driven the rapid decline in credit card debt. The weak economy has forced consumers to spend less on credit cards and banks dramatically increased lending standards in the wake of the financial collapse, leading to less credit extended. But charge-offs have been the real driver (“Chargeoffs a Key Driver in Declining Credit Card Balances,” Sept. 23, 2009). As unemployment soared, and continues to remain high, more debt went bad, prompting banks to write it off.

Ratings agencies Moody’s and Fitch both said that the charge-off rate for credit cards improved in the first quarter. But the average charge-off rate for credit cards remains above 10 percent, a historically uncharted level.

These charged off accounts are being pumped directly into the ARM industry. Banks have increased their outsourcing to third party debt collection agencies and have also been forced to sell more debt, even as prices remain unattractive for lenders. The trend is not likely to change anytime soon, as unemployment remains stubbornly high, causing more Americans to fall behind on their credit card bills.