Credit Card Debt At 18-Year Low: Have We Learned Our Lesson?

Until the recent downturn, delinquencies and outstandings on credit card debt exploded as consumers took on more debt and struggled to pay it back. A very different situation exists today. Delinquencies have declined and many consumers now avoid credit card debt. Is this a short-term phenomenon, or have consumers learned that taking on high cost debt needs to be avoided?

The performance of current credit card portfolios has improved dramatically from a few years ago. Payment delinquencies of 30 days or more stood at 5.01% in 2009 with a fifteen-year average for late payments of 3.87%. Today, delinquencies in the fourth quarter of 2012 had declined to 2.47%, their lowest level since 1994.

Delinquencies have dropped for at least three reasons. First, banks have temporarily tightened up their lending standards to eliminate subprime borrowers, many of whom ran up high balances that they were unable to pay off. I deliberately used the word temporarily. Publically traded banks need to grow their assets to maintain investor interest and a strong stock price. As the economy stabilizes, more banks will loosen current credit standards, believing that their risk management practices can effectively assess lesser credit risks. Historically, such views have been proven wrong more than once, but the need for growth often colors internal risk concerns as business groups push for more leeway over credit decisions. 

Second, banks have stepped up their collections efforts. In recent years bank collection departments were hiring when many other groups were cutting back. Whether using proprietary systems or third-party experts, banks concentrated on getting consumer delinquencies up to the top of the payment pile and often renegotiated debt payments to lower delinquencies and make loans current.

Third, and ultimately the most intriguing area, involves the segments of consumers who have opted out of relying on credit card use. Overall, credit card debt while down from a few years ago still approaches $850 billion with average credit card debt per household of $7,117 at the end of 2012 reduced from $7,768 in March 2010. More disturbing, the 46.7% of households that have credit card debt owe $15,257.

While in total many Americans remain debt-ridden, the critical news is that many young adults are avoiding the pitfalls that credit cards can create. A 2012 Sallie Mae survey found that only 39% of undergraduates form 18-24 own credit cards, down from 49 % in 2010.

Further, a Federal Reserve report shows that under 35-households carried median balances of $2,100 in 2010 versus $2,500 in 2001. Comments from young adults suggest that a sea change in mind set may be occurring as a result of the downturn as well as an anemic economic recovery. The Chicago Tribune recently quoted one 20-year-old who limits herself to debit cards because “I don’t want to be paying on my money.” Cliff Zukin, a professor of public policy and political science at Rutgers, suggests that young adults suffer from an economic insecurity that limits their willingness to take on debt: “This is a generation that is scared of commitment, wants to be light on their feet and needs to adjust to whatever happens … What was once seen as a solid investment, like a house or a car, is now seen as a ball and chain with a lot of risk to it.”

Avoiding the “ball and chain” also means avoiding the debt that goes with it. And, this tendency may continue. Bloomberg reports that average incomes for those 25-34 have fallen 8% since 2007, double the adult population’s total drop. Many from Generation Y lack the opportunity to take on debt while others with the economic wherewithal may simply be wary of doing so.

Inevitably, banks will reach further down into the risk pool to offer cards to more customers and to increase credit limits for current card owners. While I hesitate to echo the words of one observer who says Gen Y is “permanently depressed,” this is a group that continues to experience lowered expectations and a future scenario distinctly different from their Baby Boomer parents. Fortunately, at this point they lack either the opportunity or the desire to build up debt they may be unable to repay.