Credit Card Debt

Introduction To Credit Card Debt

Ben Franklin once said:

“I’d rather go to bed without supper than rise in debt.”

What would he think of credit cards?

Regardless of Mr. Franklin’s warnings, credit cards have become big business these days.

By some estimates, the average U.S. household has $9,840 in credit card debt.

So, how did the U.S. get here? Is this an global phenomenon too? And, where is this trend headed? Let’s take a look at credit card debt and see where all this came from…and, for purposes of this article, we will be focusing primarily on consumer credit card debt.

Let’s start from the beginning…

What Is A Credit Card?

A credit card is a type of bank card that allows the account holder to buy things on credit. They are also sometimes called “charge cards.” According to CreditCards.com…

“The first widely accepted plastic charge card was issued in 1958…”

http://www.creditcards.com/credit-card-news/

We’ve come a long way since 1958 as credit cards are now embedded in modern culture.

Credit cards are issued by major banks to allow consumers and businesses to purchase goods presently and pay back the money at a later date. Credit cards offer many benefits like free rewards (sky miles, hotel stays, gift certificates), fraud protection, and cash advances. The amounts that people charge on credit cards are generally considered unsecured loans from issuing banks – the plastic cards are the mechanism by which the loans are made.

Some credit cards require the consumer to pay off their balances monthly. They charge an annual fee to make their money instead of charging interest on credit card debt which floats from month to month.

What is Debt?

In common terms, debt generally refers to an amount of money owed another party. Another way of looking at it is to think that debt generally represents money that needs to be paid back in the future. There are all sorts of different types of debt. Many different types of people and organizations borrow funds:

• Personal Debt- Student loans, bank loans, and credit cards.
• Corporate Debt- Businesses borrow money to fund their operations. Sometimes businesses issue bonds to borrow money.
• Government Debt- Treasury bills and municipal bonds are ways governments borrow money.

What is Credit Card Debt?

Combining the two concepts above, we can deduce that credit card debt is money due a credit card company for past purchases or cash advances.

Different Types of Credit Cards

There are many different types of credit cards that are available on the market today. However, just because a bank card has a credit card logo on it, that doesn’t necessarily mean that it is a credit card in the traditional sense. A good example is a standard ATM card that a customer receives when opening a new checking account. This is a “debit card.” Debit cards look like credit cards and they are accepted by merchants who accept credit cards. The difference is that debit cards withdraw funds directly from bank accounts, nothing is put on credit.

Debit Cards and Secured Credit Cards

As stated above, debit cards directly withdraw funds from checking accounts. According to Investorwords.com, a debit card is:

“A card which allows customers to access their funds immediately, electronically. Unlike a credit card, a debit card does not have any float.”

http://www.investorwords.com/1310/debit_card.html

Investorwords.com introduces the concept of “float” which can be thought of as the time period in which the bank lends funds to their customers. EG. 30 days.

Secured credit cards are a different breed altogether. These credit cards are generally secured by a savings account- in other words, if the customer defaults on (doesn’t pay) his balance, the credit card company may claim the funds in the savings account. The overwhelming majority of credit cards are not secured credit cards.

Unsecured Credit Cards

Most credit cards are unsecured. That is, they are unsecured loans extended by banks to customers. In the event that the customer doesn’t pay the balance, the issuing credit card company usually cannot seize anything for payment.

Credit Card Markets

Just how big is the credit card market around the world? Given the differences in accounting systems between countries and companies, it’s very tough to pin down any hard numbers, but let’s give it a shot….

The Global Credit Card Market

Let’s first look at the global credit card market. That is, the total credit card industry around the world including the United States.

If the stat found here is to believed…..

“By 2008, the market is forecast to reach a value of $4,107.5 billion, equating to a CAGR of 8.1% in the 2003-2008 period.”

.http://www.researchandmarkets.com/reports/c26283

…the global credit card market is estimated at roughly $4,000,000,000,000. For those us who can’t count that many zeros, that’s 4 Trillion Dollars.

$4Trillion!

The Credit Card Market in the United States

According to U.S. News and World Report:

“Total U.S. consumer revolving debt reached $962 billion in May 2008, up from $879 billion at the end of 2006. About 98 percent of that debt was credit card debt.”

http://www.usnews.com/articles/business/economy/2008/

These numbers don’t square up with the numbers above given that historically 50% of consumption happens in the U.S. While credit cards aren’t consumables, they can be considered financial products in a sense. So, the calculations may be being done differently given the different sources. It may be that US News is using “revolving” debt, which has a definition that is difficult to deduce. Does “revolving debt” mean long term outstanding debt?

It’s unknown.

Regardless, if we use the US News numbers, the total US credit card debt can be estimated at approaching 1Trillion dollars. 1 Trillion dollars/300MM people= $3,333/ PERSON in the U.S. alone. That’s HUGE!

(This number of course is smaller than the number cited above as this is per person, not per household).

Predatory Lending

There has been a lot of press recently about so called “predatory” lending, especially in regards to mortgages and payday loans. Predatory lending practices can deceive customers into signing up for loans with unfair or abusive terms. And this type of lending applies to credit card lending practices too.

• 25 states allegedly have anti-predatory lending laws.
• These states include Arkansas, California, Colorado, Connecticut, Florida, Georgia, Illinois, Kentucky, Maine, Maryland, Massachusetts, North Carolina, New York, New Jersey, New Mexico, South Carolina, Nevada, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Wisconsin, & West Virginia.

From http://en.wikipedia.org/wiki/Predatory_lending

Also see The Federal Truth in Lending Act, and this article.

Who Has Credit Card Debt? Statistics and Analysis.

Let’s move on to looking at what kind of consumer carries the highest credit card debt. Sometimes products (if we consider credit cards and credit card debt to be products) have certain market segments that are more likely to be customers. Since the U.S. is the easiest market to get data for (the international markets prove very difficult to dig up info on), we will focus on it.

Historical Numbers

Much like the global numbers on credit card debt above, the stats on historic credit card use and indebtedness are difficult to calculate.

“Average credit card debt among indebted young adults increased by 55 percent between 1992 and 2001, to $4,088. (Source: “Generation Broke: Growth of Debt Among Young Americans”)”

http://www.creditcards.com/credit-card-news/

But, who is considered ‘indebted’ and who is considered ‘young’. And these stats are a little old as they are roughly 7 years old at the time of this writing.

There are more stats and a really good introduction to the history of the credit card industry over here:

http://www.pbs.org/wgbh/pages/

And it’s from PBS…they usually have well researched information.

Current Statistics on Credit Card Debt

As stated above, if we extrapolate the data, it can be estimated that every person carries roughly $3300 in credit card debt. However, given that the current US population of 300MM will have at least 10% children and some people carrying zero credit card debt, this number may be even higher for the average indebted consumer.

In fact, the calculation of $9,840 per household might be more realistic. But, how much of this is in balances that are paid off every month and how much is in permanent debt?

Credit Card Debt Forecasts

Using the global growth rate of the credit card industry of roughly 8% per year (from above)…if things continue at this rate, we can forecast the following US household debt levels for the next few years:

• 2009: $10,627
• 2010: $11,477
• 2011: $12,396
• 2012: $13,387
• 2013: $14,458

Will this pace decrease or increase? It is unknown at this time. However, debt levels clearly can increase more quickly than you’d imagine at first glance.

By the way, here are 2 counterpoint articles refuting the methodology used to calculate the $9,840 number:

http://moneycentral.msn.com/, http://consumerist.com/.

Note, the MSN article is using 2001 data! The world has changed A LOT since 2001. Does anyone feel richer in 2008? Does anyone think they have better job security? Furthermore, what about credit card payment defaults? Since all these stats are murky at best, we’ll stick with $9,840 for purposes of this discussion.

Demographics And Credit Card Debt

Is debt demographic specific?

These quotes make that a difficult question to answer without more investigation……

“* While white households carry more credit card debt, African Americans and Latinos have a higher percentage of credit card-indebted households. In 2004, of those with credit cards, 84 percent of African-American households and 79 percent of Latino households carried credit card debt compared with 54 percent of white households.
* Over 90 percent of African-American families earning between $10,000 and $24,999 had credit card debt.”

http://www.commondreams.org/news2007/1107-09.htm

So, how do you balance these stats? Could it be that white households hold higher balances but pay them off quicker? This information is seemingly important but left unanswered.

Clearly, further analysis of these stats is needed.

Credit Card Debt and Seniors

There has been a lot of news coverage lately regarding senior citizens falling deeper into dept & pursuing bankruptcy in greater numbers than in years past…Here are a few news articles detailing just such a phenomenon:

“In 1991, the 55-plus age group accounted for about 8% of bankruptcy filers, according to the study, which looked at more than 6,000 cases filed in 1991, 2001 or 2007. By last year, filers 55 and over accounted for 22%.” from: USA Today: Study: Bankruptcies soar for senior citizens

and…

“In 1991, seniors comprised right around 2.4 percent of the population of filers; by 2001, that had climbed to 5.1 percent.” From: Seniors and Bankruptcy: America’s Dirty Little Secret

Finally, commondreams.org adds this:

“* Since 1989, Americans over 65 have experienced the greatest increase in the amount of credit card debt carried. The average balance for this age group increased 194 percent from $1,669 in 1989 to $4,906 in 2004.” http://www.commondreams.org/

While many of these articles might sound somewhat alarmist…this is a trend that we are seeing pop-up in the keywords that people are using to find our site…

There is undoubtedly more to this story and it’s a trend worth paying attention to if the numbers are as pronounced as the articles say they are…

Credit Card Debt Relative to Income Levels

In the U.S., the median household makes roughly $50,000/year as of 2007 (http://www.census.gov/hhes/www/income/histinc/h05.html). This means that the median household has a little more than $4,000 ‘coming in’ before taxes every month. After taxes, housing, cars, and food expenses, a 3rd party observer would be right to think that the amount left over is what a household has available to service any personal debt (like credit card debt) and other purchases.

Therefore, it’s surprising that there isn’t a lot of attention given to the ratio of consumer debt in relation to income. It would make sense that the higher the ratio, the smaller the chance that debt will be paid off. After all, if a consumer doesn’t have the money to service his debt, how can he? Dividing debt levels by income levels can shed some light into a household’s realistic ability to repay money..

According to this chart here, the 1987 median household income was $26,061 and in 2007 it was roughly $50,000. So, while the median income has doubled in the last 20 years, read this:

“Back in the 1980’s consumer debt stood at roughly 65% of disposable income. In the 1990, consumer debt stood at roughly 85% of disposable income. Today, this kind of debt stands at 110% of disposable income.” http://www.money-zine.com/

What’s the number to key in on here?

• 110%. Yikes!

Once again, these stats are hard to quantify accurately. Are there less people per household today? How are these numbers compiled? And, what exactly is “disposable” income?

The best we can hope to do with these numbers is get a rough estimate confirmed what we see outside every day. However, would it be surprising to learn that consumers have been carrying debt loads equal to 110% of their disposable incomes in recent years? Probably not….

Clearly, the debt levels of today are different. Both in size and in type. George Soros even mentions how the debt landscape has changed during the last century in his latest book:

“….There were no credit cards and very little unsecured credit…”

http://www.amazon.com/New-Paradigm-Financial-Markets-Credit/dp/1586486837

http://www.nybooks.com/articles/21934

Biggest Issuers of Credit Card Debt

Many large banks are big players in the credit card industry. So, who are the biggest issuers of credit cards?

Click here to visit Creditcards.com and see the list.

Managing Credit Card Debt

Once a consumer purchase something on credit, they are required to pay back the debt according to the terms of the contract. Credit card companies can and do impose fees and charge interest if debts are not paid back on time.

Interest and APR

Credit card companies can sometimes charge interest rates that exceed 20% per year if amounts are not paid back within certain time periods (often 30 days).

The term “APR” is an acronym for “annual percentage rate” which is the annual interest rate charged on credit card balances.

According to The Federal Reserve:

“The annual percentage rate–APR–is the way of stating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another card. The APR states the interest rate as a yearly rate.”

From http://www.federalreserve.gov/

Some credit card companies offer introductory 0% APRs for certain time periods like 12 months. During these 12 months, the consumer is supposed to be charged no interest. However, when the rates change, consumers can suddenly find themselves with large credit card debt subject to APRs exceeding 20%. Reading the fine print of any credit card offer (or any contract for that matter) is always a good idea.

See The Federal Reserve website for more good advice about credit cards and credit cards‘ APRs here.

Also, see these articles on finding 0% credit cards here and here.

Penalties

In the contracts that customers agree to initially, customers sometimes agree to pay penalty fees if they do not submit their payments on time. These penalties are often in the form of fixed amounts like $25 or $50. The terms are often specified in the fine print of credit card contracts.

Minimum Payment

Consumers are supposed to send in their payments after they’ve charged goods and services on their credit cards. Customers who don’t pay their credit card balances can sometimes be subjected to debt collectors.

However, many credit card companies allow their customers to make a small monthly payment every month in order to stay in good standing. This is called the minimum payment. See this article for more info on minimum payments.

Default

If a consumer does not pay (and does not plan to pay) his credit card balance, he is considered to have “defaulted” on his credit card debt. At this point, collection efforts may commence and the debt may be sold to a 3rd party if the issuing credit card company does not think that they will be able to collect the debt.

Here is an article about credit card defaults from South Dakota. Also see Credit Card Default Rate Is Climbing from The New York Times.

Balance Transfers

After some consumers run up credit card debt, they look to transfer the balance to another credit card company in hopes of working out better terms with the new bank. This is generally called a ‘balance transfer.’

Balance transfers are very common.

Debt Consolidation

Some consumers look into debt consolidation as another means of dealing with credit card debt and other types of debts.

Answers.com defines debt consolidation as “The action of combining several loans or liabilities into one loan. Put another way, debt consolidation is the process of taking out a new loan to pay off a number of other debts.”

There is also some decent debt consolidation information found over here:

http://www.lowermybills.com/tipsadvice/credit-card-debt.jsp

There are mixed reports as to whether or not debt consolidation works in every situation. For people considering debt consolidation, more research is required.

Debt Counseling Before Bankruptcy

As of 2005’s passage of the Bankruptcy Abuse Prevention and Consumer Protection Act, people filing for bankruptcy must now undergo credit counseling prior to bankruptcy…

According to Money-Zine.com…

“Roughly 2.0 to 2.5 million Americans seek the help of a credit counselor each year, mostly to avoid bankruptcy.”

http://www.money-zine.com/Financial-Planning/

(By the way, there is more really good credit card info on that site. Courtesy of Georgetown University).

Credit Card Debt and Bankruptcy

General Principals of Bankruptcy

Many consumers find themselves unable to deal with their debts and want to get a “fresh start.”  Therefore, many of these consumers (who, once they file for bankruptcy are now “debtors“) turn to filing for bankruptcy to deal with their financial problems. While many debtors are still able to use bankruptcy to get a fresh start by discharging some of their unsecured debts, it’s become more difficult recently. We’ll discuss that below.

Chapter 7 and Chapter 13 Bankruptcy

When most people think of bankruptcy, they probably are thinking of Chapter 7 bankruptcy which is sometimes called “regular” bankruptcy. In a Chapter 7 filing, the debtor is allowed to discharge some unsecured debts and get a fresh start. This is in comparison to the other major type of personal bankruptcy, Chapter 13 bankruptcy, in which a debtor generally works with creditors to design a repayment plan. Therefore, it’s not surprising that many debtors want to file Chapter 7 and not Chapter 13. However, since the enactment of 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, more consumers are finding it difficult to qualify for Chapter 7 due to new requirements.

Chapter 7 Bankruptcy and Credit Card Debt

As stated above, credit card debt is usually considered unsecured debt. Therefore, many people hope to discharge credit card debt by filing for Chapter 7 bankruptcy.

Statistics on Bankruptcy Filers Filing For Chapter 7 Relief

So, how many people file for Chapter 7 bankruptcy annually?

Here are some stats from 4 major states for the 12 months ending June 30th, 2007:

1. California: 52,375
2. New York: 35,746
3. Texas: 39,201
4. Florida: 31,210

Source: http://www.uscourts.gov/

Chapter 13 Bankruptcy and Credit Card Debt

Chapter 13 is a very complex topic to deal with in this brief space. However, the big concept to keep in mind is that Chapter 13 is more focused on getting a debtor to design a repayment plan instead of discharging debt. And credit card debt is no exception.

Changes To The Bankruptcy Law in 2005- BAPCPA

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act with the alleged intent of stopping “abuse” of the bankruptcy process. Whether there really was a high level of abuse that necessitated a “reform” of the bankruptcy law will be debated for years. And courts are still trying to determine how to apply the changes to the bankruptcy law. However, one of the major changes was that now some debtors will be forced to file for Chapter 13 bankruptcy instead of Chapter 7.

See this link for more:

http://www.usdoj.gov/ust/eo/bapcpa/index.htm

BAPCPA Means Test

One of the major components to the BAPCPA is that now debtors are subject to a “means test” to determine whether or not they are eligible for Chapter 7 bankrutpcy. The means test can be rather complex and it’s scope is outside of this discussion. However, here are some excellent resources regarding BAPCPA’s “means test”:

http://www.uscourts.gov/

http://www.moranlaw.net/means_test_map.htm

Credit Card Debt FAQs

Who Pays Credit Card Debt?

Consumers are expected to pay their credit card debt. If someone charges a $300 bar-b-que on a credit card, that amount automatically becomes a $300 debt to pay off. After it’s paid off, the debt disappears.

What if a Consumer Can’t Pay Their Debt?

Consumers who can not pay back their debts are left with few choices. However, non payment can often lead to penalty fees and interest charges. If a consumer files for Chapter 7 bankruptcy, the debt may be discharged, assuming she qualifies for Chapter 7.

What is a Credit Score?

A credit score is a 3 digit assessment of someone’s credit risk. It’s also called a FICO Score. See this link for more definitions. Also, see this and this.

Does Credit Card Debt Affect a Consumer’s Credit Score?

Just like in business, if a consumer has a high debt load, he may be a riskier consumer to lend to.

While no one knows exactly how a credit score is calculated, heavy debt loads may lead to lower credit scores.

Will Filing for Bankruptcy Affect a Consumer’s Credit Score?

According to this article, a bankruptcy can affect someone’s credit score for up to 10 years. However, the same article states that people may start receiving new credit card offers almost immediately after bankruptcy proceedings are complete.

Conclusion

Credit card debt has become a very hot topic in recent years. It seems that many consumers are having difficulty paying off the amounts that they charged in order to maintain their spending habits. However, debt is something that needs to be eventually be dealt with, one way or another. It looks like more consumers may be carrying larger amounts of credit card debt than in years past if the statistics are to be believed.

Further Reading Online:

http://www.nytimes.com/2008/08/06/opinion/

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

http://www.pri.org/business/economic-security/credit-card-borrowing.html

http://money.cnn.com/2008/09/15/pf/bc.creditcard.deliquenci.ap/index.htm

http://www.ibisworld.com/industry/default.aspx?indid=1293

http://www.creditcards.com/credit-card-news/

http://www.usnews.com/articles/business/economy/2008/

http://www.consumeraffairs.com/news04/2007/12/credit_card_debt.html

http://www.cardratings.com/creditcardstatistics.html

http://www.dumblittleman.com/2006/06/

http://www.thesimpledollar.com/2008/06/05/

Recommended Books:

Maxed Out

Generation Debt

Thank you for reading our discussion of credit card debt.

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