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.
Silly me.
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?
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{ 10 comments… read them below or add one }
I vote for another sign of deteriorating values. Living in Las Vegas, I've seen bankruptcies, foreclosures, and terribly high unemployment. Combine that with the fact that this city has so much bling, it is extremely difficult to live within one's means. Yes, I'm jealous of those who game the system with bankruptcy, strategic default, and/or hiding their Mercedes in the garage from the repo-men.
Regarding credit, it's like heroin to most people.
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I'd like to stay positive. I think more and more people nowadays are spending less; children and teenagers talk about saving money instead of spending it all on junk; and savings rate has increased.
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I do think people are spending less. But I don't like that people who don't pay their bills are able to scam the credit card companies and the IRS with write-offs. Those commercials on TV advertising that they'll get the IRS to write-off 90% of your taxes infuriate me. Why the heck am I paying mine? They're just driving my taxes up. Same thing with credit cards. I use them responsibly and we pay them off every month. If we don't have the money, we don't buy it. The responsible people who do need to carry a balance on their cards end up paying more fees and interest to cover for the dead beats. What a system!
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I read the same MSN article and it really depressed me, too. As a nation, our biggest financial hurdle is our rampant ignorance about money. Apparantly, the Greatest Generation didn't teach their kids, the Boomers, to live within their means and spend less than they make. Of course, the Boomers didn't teach their kids, either. Then the 80's happened. Banks and credit card companies started passing out credit cards like they were party favors and we snapped them up. The attitude became "Why pay for something when you can charge it?" We didn't understand that credit allowed us to get in way over our heads because using a card doesn't empty your wallet or bank account like using cash does. Well, now the party's over and the hangover is kicking our collective tucus.
But, and here's the worst of part of it, we still don't know how to get out the mess we've made. Yes, there are loads of PF bloggers like you and your mother, but how many people are reading them? How many people who desperately need financial knowledge are reading MSN money articles and columns? Too blipping few, that's who! It's heartbreaking.
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depressing!
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There are so many factors to look at when considering the credit card dillema. There are ignorant people out there who go wild with a bit of plastic, and others who may have used them sparingly at one time but are forced to turn to them for living expenses now. Not all people charging them off are irresponsible. Some ran into health care nightmares, or housing or employment emergencies, but then there are the others….the ones that use the system to their advantage even if there is another way to handle it. It would be nice if we could all look at finances together as a nation and come to a collective realization about the importance of thrift and savings and paying debts off.
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We, as a country, are in a mess. Is there a reason we can't do what the Jews did in old testament times? Start over by forgiving debt. Across the board. This concept could begin things with a solid foundation.
Maybe it's too easy. But by the time all of this mess is cleared up, a lot more money could be wasted by trying to collect.
Thankfully, with some hard work, we are not in financial trouble. I don't know what tomorrow will bring. So this thought is not for personal gain, but rather putting the country back on track.
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As per record, consumer credit rose at an annual rate of 5 percent in the second quarter of 2008. Both revolving credit (such as credit cards) and non revolving credit (such as car loans) increased by 5 percent in the quarter. In June, consumer credit skyrocketed by 6-3/4 percent at an annual rate.
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This shows that rather than paying off credit card debt consumers are actually charging off their debt at alarming rates. While this does ruin the credit of the consumer, it appears that many feel that they have no alternative. It doesn’t bode well for the consumer or the economy that the numbers are as high as they are.
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Depressing ..is saying the least. More and more people are filing for bankruptcy these days.
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