Numbers Don’t Tell Debt Reduction Story

July 22, 2010 – 6:34 am

A recent news story from the Associated Press offers more evidence that consumers are getting better at debt reduction. According to the story, five of the nations top six issuers of credit cards report that delinquent payments are falling. At the same time, five of the top six credit card companies report that charge-offs have become less frequent. A charge-off occurs when credit card companies give up on ever collecting a specific consumer debt. The fact that both charge-offs and payments that are delinquent 30 days or more are on the decline would seem to suggest that U.S. consumers are doing a better job of consolidating debt. But, as is often the case in todays troubled economy, you wont get the whole picture by simply looking at the numbers.

How Much Debt have Consumers Eliminated?

The numbers from the last year suggest that consumers have taken great steps in eliminating their credit card debt. In fact, total consumer credit card debt has fallen every month in 2010. But some financial experts are skeptical that this shows a sudden change in the way U.S. consumers are viewing money. The optimists say that the shock of the Great Recession has caused consumers to save money and tackle debt reduction in case of another economic slump. Pessimists, though, argue that the reduction of consumer credit card debt is a misleading number. They say that much of this debt reduction is the result of credit card companies giving up on ever collecting a significant portion of the money owed to them. Without the rising number of bad debt charge-offs, these pessimists argue, the decline in consumer credit card debt would not be nearly as impressive.

Debt Consolidation Still Needed?

The pessimists would say that debt consolidation programs are still very much in need by the typical U.S. consumer, especially those consumers who have lost jobs or have had their annual incomes reduced. These consumers need to put more purchases on their credit cards in order to make it from week to week, at least until they manage to nab a better-paying job. That, of course, is no easy task when the national unemployment rate still stands near 10 percent. For consumers who are struggling with rising levels of consumer credit card debt, debt consolidation loans remain a viable option. These loans arent perfect; the interest rates that come with them can be high, and debt consolidation loans will hurt consumers credit scores. But when debt becomes overwhelming, a debt consolidation loan can at least offer some financial relief.

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