The Myth of Paying off Our Debts

The Daily Beast explains why we are paying off far less credit card debt than we think.

Consumer credit data is reported by the Federal Reserve each month, but the published statistics don’t include the billions of dollars banks are required to write off the books each year. And in the past several years, there’s been an epic level of write-downs: $85.6 billion in 2009, $77.1 billion in 2010, $45.5 billion in 2011, and $17.2 billion so far in 2012.

This matters for two big reasons. While charge-offs reduce the outstanding credit-card balances that banks report, consumers are still on the hook for charged-off credit-card debt for 3 to 15 years, depending on the state, and banks still try to collecton it. Want to tell them it doesn’t count?

Second, the charge-offs give us a misleading picture of what consumers are actually doing. If banks charge off $10 billion in one quarter, but consumers add $8 billion in new credit-card balances, the figures will show a decline in overall borrowing—at a time when consumers actually piled on more debt. That’s what has been happening in the economy. Outstanding credit-card balances have decreased by $190.5 billion since 2008. Great! But there have been $226 billion in charge-offs in that period. So instead of paying down a hefty amount, consumers have actually added $35.5 billion to their credit-card bills. If people were really paying down credit-card debt, the outstanding credit volumes would be falling much more rapidly.

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