I know, I know — we keep hearing that debt is dropping. But that’s only true in the most technical of terms.
Thanks to the MSN article, Credit Debt Falling? Not Really, my optimism was dashed when I learned that the overall debt totals are dropping only because of the credit card companies’ charge-offs.
A charge-off occurs when a company realizes a loss on unpaid debt. Rather than continue trying to collect, the business writes off the amount owed. Even though the account still hasn’t been paid off, that debt is erased from the books. It no longer counts toward the amount the company is owed by its customers.
And so, as more and more people continue not to pay, the overall debt owed to credit card companies drops. In fact, the article says, credit card debt dropped about 12% in the second quarter — even as credit card spending increased about 6% in the first half of 2010.
I think it’s an apt metaphor for Americans’ skewed perception of personal finance: We get patted on the back for being more responsible, even as we increasingly fail to live up to our responsibilities.
This whole thing depresses me (in case you couldn’t tell from that last comment) because I let myself buy into the hype. Part of me wondered whether charge-offs figured into the total — the part of me that remembered accounting for them in some bookkeeping classes.
But more and more PF blogs were popping up detailing some people’s diligent work toward fiscal responsibility. So I let myself believe that, as a whole, we really were slowing down our rampant spending, learning to live within our means, and paying off what we owe.
Of course, I understand that some of this is situational. I was surprised that credit card debt could fall during a recession where unemployment hit so hard. I had assumed that more people would find themselves having to finance some basic expenses on their cards, as unemployment compensation fell short of actual outlay. And apparently, I was right. At least, I hope that’s why credit card spending increased.
In the second quarter, individual credit card debt increased by about $9.7 billion. In three months. And not all of that can be attributed to double-digit interest rates.
Meanwhile, the charge-off rate for the quarter was $21.8 billion — and you can’t blame that on high unemployment rates. Charge-offs only happen when no payments are made for 6 months. So, if you at least make minimum payments, your debt won’t be charged off.
That said, I wonder how many people are going to debt settlement agencies (the bad kind) that encourage them to let the debt be charged off. That may have something to do with it. But doesn’t that say something about our moral character, that so many people can agree to those methods?
What do you guys think about all this? Depressing? Expected? Another sign of deteriorating values?