In the first quarter of 2011, the average amount of debt carried by an individual consumer dropped to $4,679, the lowest it’s been in an entire decade. By focusing effort on paying off their debts instead of charging themselves deeper in the hole, cardholders are slowly improving their credit scores and, in turn, making themselves eligible to receive the best credit card offers lenders are extending.
photo credit: Andres Rueda
According to data in a report recently released by the third-largest credit bureau in the United States, TransUnion, consumers have been slowly but surely unburdening themselves of their personal credit card debt. From the first quarter of 2009 to the first quarter of 2010, cardholders have made roughly $72 billion more in payments towards their outstanding credit card balances than they have spent making new purchases.
Many in the financial industry have hypothesized that the primary reason for the reduction of consumer credit card balances as of late can be attributed to charge-offs, the practice in which creditors write off all debt they have deemed uncollectable as a loss.
Vice president of research and consulting in TransUnion’s financial services business unit, Ezra Becker, stated, “Many people in the financial services industry believe charge-offs have been the leading factor in declining credit card debt since the start of the recession. In fact, some have stated that charge-offs account for the entire change in card balances over the past two to three years. In reality, the dynamic is more complex. Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times.”
The results of TransUnion’s study will provide card-issuing companies with valuable information they can implement when offering products such as credit cards with rewards programs, low interest rates, and credit cards for people with no credit.
“It is also important to note that the drivers of deleveraging on an incident basis are different at various points along that credit risk spectrum,” continued Becker. “Charge-off is a more predominant driver of deleveraging among subprime consumers. Among prime consumers, paydown is the major factor. Although it sounds simple, this is critical insight for lenders: it allows them to better understand the preferences of various sub-segments of consumers and respond appropriately to each.”
Another interesting fact revealed by the study is the increasing number of younger cardholders who are opting to use their debit cards instead of their credit cards when making purchases. “All things being equal, we believe that consumers, especially younger adults, will continue to have an increasing preference to use their debit cards over credit cards. However, the credit/debit card landscape is still in transition. Regulatory and legislative proposals either currently under discussion or recently enacted will impact the industry significantly and could alter this payment preference trend. Thus, consumer credit use and behavior should be closely monitored in the coming years,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit.
Michael German is an expert in the field of personal finance and a graduate of Columbia University. His lengthy tenure includes literary work with The New York Times international weekly edition, where he contribute reports on global economy and consumer trends. As a writer and researcher in personal finance, Michael is also a contributor to themanhattandaily.com, freemoneywisdom, and many other online and print publications.