Credit Card Balances Rise Nationwide Despite Increased Reduction Of Debt

Americans paid off $34.7 billion in credit card debt in the first quarter of 2015 while racking up a whopping $55 billion in additional card debt so far this year, according to an annual study on credit card debt by CardHub.

The average household’s first-quarter credit card balance of $7,177 is the highest point in six years, according to the study. Local debt and finance experts said Americans will use credit cards at a fast pace for the rest of this year but that doesn’t spell disaster at this juncture.

CardHub is a credit card research firm that helps customers find the right card to meet their needs. It is owned and operated by Evolution Finance.

The findings of the study are in line with UA economist Kathy Deck’s data which she gets from the Federal Reserve and Federal Reserve Bank of New York, both of which track household indebtedness. Deck is the director for the Center for Business and Economic Research at the University of Arkansas.

“Consumer confidence is higher now than in a recession and companies are extending more credit in an economic expansion,” Deck said. “It’s supply and demand.”

Mark Foster, spokesman for Credit Counseling of Arkansas, had similar comments.

“We’re coming out of the great recession when lenders tightened their belts on lending and consumers were building up savings,” Foster said. “Now, we’re starting to see more increasing debt.”

Credit Counseling has offices in Fayetteville and Fort Smith.

This year’s first-quarter debt pay down was 7% larger than those in 2013 and 2014, according to the CardHub study. However, the study indicates that debt reduction is common at the beginning of a year due to the timing of annual salary bonuses, tax refunds and follow up on New Year’s Resolutions.

Other main findings of the study include:

• Defaults also declined by more than $350 million in the first quarter, compared to the first quarter of 2014, bringing this year’s default rate to its lowest point since 1995;

• This year’s first quarter pay down is still 29% below the most recent peak payoff of $44.6 billion in the first quarter of 2009; and

• If the average household transferred its credit card balances to one of the market’s best balance transfer credit cards, that household could save up to $1,700 in finance charges, depending on their payoff timeframe.

“It might be that folks feel more comfortable about charging again as the economy slowly improves,” Foster said. “People tend to be gun-shy after being burned with fewer raises, decreased hours and layoffs.”

Normally, in a recessionary period, the credit counseling agency sees an increase in the number of clients seeking help with their debt. That didn’t happen in the most recent recession, Foster said. Rather, he added, “Some people jumped over us into debt settlement and bankruptcy.”

“As people are more comfortable, we expect to see credit card debt grow,” he said.

An interesting sidebar, Foster said, is that young adults are not using credit cards as much as older Americans, preferring instead the use of debit cards or prepaid cards. According to Bankrate.com, a website which tracks financial rate information, 63% of millennials – between ages 18-29 – don’t have credit cards while only 35% of people over 30 don’t have credit cards, Foster said.

Tightening credit restrictions and greater use of debit cards are causing concern, particularly among younger adults, he said.

NerdWallet.com reports that U.S. household credit card debt averaged $15,706 as of June 2015, when considering only those households carrying debt. Credit card debt is the third largest source of household indebtedness. Only the mortgage and student loan debt markets are larger, according to the Federal Reserve.

While credit card debt is rising for the average household, the rate of default continues to trend lower according to the S&P/Experian Consumer Credit Default Index released June 15. The bank card default rate reported its first decrease since January 2015 with a rate of 2.98%, a decrease of 0.20%, its largest reported decrease since October 2013, according the index. Mortgage defaults and auto loan defaults are also lower.

“Consumer credit default rates are below pre-crisis levels, at new lows and continue to drift down,” said David Blitz, managing director and chairman of the Index committee at S&P Dow Jones Indices. “These low levels should not come as a surprise: interest rates haven’t turned up, consumer debt service as a proportion of household income is close to its record low, and the Federal Reserve reported that consumer wealth was at a peak in the first quarter of 2015.”

He said lower debt levels do not mean that no one is spending. On the contrary, Blitz said May light vehicle sales were the highest since July 2005 and retail sales jumped.

“The economy looks good, consumers are spending and credit usage is rising. The combination of low debt service and economic expansion should ease worries about the fallout some fear when the Federal Reserve boosts interest rates,” Blitz said.