Credit Card Debt on Rise

Posted by: Gene M. | Feb 26,2008

Most every day we tell people that they need to get their credit card spending under control.  It’s a good idea to have three outstanding credit cards at once, at the most.  Still, this is not stopping credit card use from going up.  A recent study about credit card debt shows that it’s spiked to the tune of 790 billion dollars.  Credit card debt is rising four times faster than it was only eight short years ago.

Why is this?  The main reason the survey states is that people are finding it much harder to secure loans based on the value of their homes.  This is core to why the housing crisis contributes very directly to an overall credit crisis.  With home values fluctuating, lenders are wary of lending too much money based on the current value – even if that homeowner has built up equity.  What does that matter if the equity is worth less than it might have been six months ago.  

So what happens?  People look for another way to secure credit: namely the easiest loan in the game, the credit card.  To look on the bright side, the rise in credit card debt is not necessarily because every person is charging a trip to Bermuda.  Simply, the rise in credit card debt is because more people are using credit cards.  They’re a basic way of life, so the rise in credit card debt is fairly understandable without it suggesting that people are being overly irresponsible.

Except look down at the survey a little further.  As many as 35% of credit cardholders pay their bills late every month.  That’s just too much.  Mainly what is worrying about a study like this is it suggests that credit card debt could face as drastic an implosion as the mortgage market.  The subprime mortgage mess wasn’t only the case of predatory lenders looking for easy bait, it was about everyday people taking on a mortgage without fully investigating the consequences.  The same could be said about credit cards.  On the bright side again, credit card debt does not carry the same kind of weight as mortgages.  Sure, there is 790 billion dollars in outstanding debt, but that’s because of the vast number of people who have credit cards.  

Another way of putting that: not everyone owns a home, but a great majority of people have at least one credit card.  This means that the 790 billion dollars is spread over a larger number of people, so defaults are not going to affect the credit card industry in exactly the same way that it brought down mortgage lenders.  The healthy profits of Visa and MasterCard bear this out.

So while high credit card debt is not great news, there’s a reason that it’s so and the debt doesn’t necessarily mean that the sky is falling.  

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