Credit Card Debt

We've had a lot of interest in our article on credit card debt statistics, so we figured it would be helpful to talk a little more at length about credit card debt.  Here we're going to look at a couple of more statistics, step back and talk about the Federal Reserve's viewpoint on debt and finish up by taking a look at a study examining the link between credit card debt and bankruptcy.

Credit Card Debt Statistics

In October of 2007, the Federal Reserve released its latest set of statistics on consumer credit and debt.  That report tells us that as of August  2007, Americans held 2.5 trillion dollars in consumer debt.  This is a pretty large number considering it does not include loans secured by real estate - such as a mortgage.

The report further breaks down consumer debt into revolving and non-revolving credit.  Revolving lines of credit consist primarily of credit card debt when we're talking about consumers.  This credit is available to consumers when they need it, and the exact purpose is not identified.  Non-revolving credit can range from automobile loans through student loans.  This is credit extended to consumers for a specific purpose.

Now to some 2.5 trillion dollars sound like a lot of money, but others might dismiss this number by thinking that many Americans make a lot of money and that much debt is really not a big deal.  Let's look at this number relative to disposable income - which is the amount left over from your paycheck after you've paid all your monthly bills.

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.

So to put things into perspective, consumer debt has roughly doubled with respect to the money a consumer could use to pay down that debt.  Said another way, it would take consumers today twice as long to pay off this kind of debt than it would have only 20 years ago.

Growing Use of Credit Cards

Maybe you've heard the term "statistics can be misleading" before and that term does apply here too.  While there is no doubt that Americans are running up more debt than ever on their credit cards, we also need to keep in perspective how consumers use their credit cards.

More than ever we see the use of credit cards as a convenience tool to pay for things.  Gone are the days of paying cash at the grocery store - it's faster to hand the cashier a credit or debit card.  Credit cards are simply convenient to use and many Americans leverage this fact and use their credit card to pay for more things than ever.

Credit Card Statistics

According to latest information gathered by the US Census bureau, there were 164 million credit card holders in the United States in 2003 and that number is projected to grow to 176 million Americans by 2008.  In addition, these same Americans own approximately 1.5 billion cards - an average of nearly nine credit cards issued per credit card holder.

In addition, Americans charged approximately 1,735 billion dollars to their credit cards in 2003 - that's just over $10,500 in annual charges.  This information includes all credit card types including bank cards, phone cars, as well as credit cards issued by oil companies and retail stores.

Concern over Debt

So should there really be any concern over all this debt?  Alan Greenspan is a former Chairman of the Federal Reserve Board.  In that role he was a pretty important person because he helped to determine if interest rates were too high or if consumer credit was a concern.  In October 2004, Mr. Greenspan had the following thoughts on consumer credit:

"To be sure, some households are stretched to their limits. The persistently elevated bankruptcy rate remains a concern, as it indicates pockets of distress in the household sector. But the vast majority appear able to calibrate their borrowing and spending to minimize financial difficulties. Thus, short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing."

The above statement indicates that the Federal Reserve was not particularly concerned over consumer debt.  But why was that true?

Debt Payments and Household Income

Mr. Greenspan points to the debt service ratio, which is a ratio of debt payments to disposable income.  This ratio includes payment on all debt - including mortgages - and he rightly points out that this indicator has not risen dramatically over the past 10 years.  This means the Fed acknowledges that the use of credit cards has increased over the years, but it's stabilized and not a concern right now.

Another thing the Fed points to is the ratio of a household's net worth to income - which is now around a factor of five.  This means that a household with $100,000 in annual income has a net worth of $500,000.  This ratio today is near a historical high and that's good news.  It means that if necessary, households have assets they can sell to pay down their debt.

If you read the last sentence of the quotation above, you can see where the real concern is for the Fed:

"Thus, short of a significant fall in overall household income or in home prices, debt servicing is unlikely to become destabilizing."

They're not worried about debt because homeowners are using credit cards in different ways and they've got a lot of assets they can use to pay off debt.  But much of that net worth comes from the recent rise in home values.  So what the Fed is telling us is this - as long as the housing bubble does not break we're okay.  But if home values decline, debt might be more of a problem.

Credit Cards and Bankruptcy

Even Alan Greenspan admitted that the elevated bankruptcy rate remains a concern.  He sees this problem as "pockets of distress" and not a widespread problem.  In 2000, the Department of Justice conducted a study that examined the link between bankruptcy filings and credit card debt.  This study examined 1,000 bankruptcy cases and found the following relationship in this population:

The above table tells us that 50.4% of these households filing for bankruptcy had credit card debt in excess of $10,000.  Of greater concern were households - 30 of them - that reported at least $75,000 in credit card debt.  Among this group, the average number of credit cards owned was 16.7, ranging from a low of eight to a high of 33 cards.  The average balance on each account was nearly $6,400.

The researchers conducting this study felt very strongly that there was a relationship between credit card debt and bankruptcy.  Clearly the Fed also acknowledges that credit cards are adding to financial stress and they are keeping an eye on the growth of debt, household income and home values - because they are all interrelated.

We hope this article gives you a little more insight into credit card statistics.  We thought that it would be useful here to not only share statistics, but also provide you with a practical example of how they are used by some very important people to make some very important decisions.

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