2014 Credit Card Debt Study

Jobs: Rosy picture or canary in a coal mine?

Image courtesy Paul Stocker

Reprinted with permission form CardHub

The economy is doing better, but not as great as the numbers initially make it seem. That is the clear common theme between the Department of Labor’s May jobs report and the newest figures regarding consumer credit card debt – an indicator of consumer spending habits and household financial health.

While the labor report revealed an addition of 217,000 jobs to the U.S. economy in May, ostensibly bringing employment back above pre-recession record levels, an estimated seven million more positions are actually needed to account for population growth and complete the turnaround. And while U.S. consumers paid down roughly $32.5 billion in outstanding credit card debt during the first quarter of 2014, that actually represents a 1% decline relative to Q1 2013 and the continued deterioration of credit card habits as Great Recession lessons fade with time.

Consumers historically pay off a lot of credit card debt during the first quarter of the year – with tax refunds, annual salary bonuses, and New Year’s Resolutions fueling their efforts. But last year’s first quarter pay down was 4% smaller than in 2012, and we ended 2013 having incurred 6% more debt overall. This year’s first quarter pay down was even smaller still. As a result, CardHub projects that we will end 2014 with a $41.9 billion net increase in credit card debt – 8% more than we racked up last year and a 14% increase relative to 2012.

So, much like more work needs to be done in the employment sector, consumers must strive to remember the corrosive impact of debt on household finances during the recession and work to get out from under its influence before the burden becomes unbearable again.

Q1 2014 By the Numbers:

• Net Result in Debt Load: -$32,487,006,345

1. Relative to Q1 2013: – 1%
2. Relative to Q1 2012: – 5%
3. Relative to Q1 2011: – 1%
4. Relative to Q1 2010: – 16%
5. Relative to Q1 2010: – 28%

• Outstanding Credit Card Debt: -$39,138,171,800
• Credit Card Charge-Offs: $6,651,165,455

Commentary:

• As has been the case for the previous five years in a row, consumers actually paid down their credit card debt in a big way during the first quarter of 2014. Unfortunately, this year’s first quarter pay down was slightly lower than in the previous three years and significantly lower than in 2009 and 2010, when consumer financial management was driven by the debt awareness of the Great Recession.
• CardHub projects that consumers will charge-off on $30.53 billion in credit card debt during 2014. If that projection holds true, consumers will have defaulted on nearly $300 billion ($298.5 billion) in credit card debt since 2009.
• The average household credit card balance declined by $352 during the first quarter of 2014, and is now $6,628.
• At 3.32%, the quarterly credit card default rate – down 0.3% from 2013 after a 12% decline last year – seems to be stabilizing near historical lows. A reversal in this trend could lead to a significant credit crunch.

Tips for Managing Debt

• Make a Budget (and Stick to It): It’s difficult to spend within reason or plan savings without knowing how your monthly spending compares to your take-home as well as what it is allotted to. That is why you should rank order your expenses – including debt payments, emergency fund contributions, and other savings – and trim the fat if necessary. And most importantly, once you develop your budget, make sure to stick to it or else you’ll have simply wasted your time.
• Build an Emergency Fund: With a robust financial safety net, you’ll be less at the mercy of the economy and able to withstand a prolonged period of joblessness, should the need arise. Your goal should be to gradually save about a year’s worth of after-tax income through monthly contributions to an emergency account.
• Try the Island Approach: The Island Approach is a credit card strategy that involves using different cards for different types of transactions, as if they are a chain of distinct yet interrelated islands. For example, you could transfer your existing debt to a 0% credit card in order to reduce your monthly payments as well as get out of debt sooner and subsidize your ongoing spending with a rewards card or two that offer high earning rates in your biggest expense categories. This will enable you to get the best possible collection of terms as well as gain a better perspective on your spending and payment habits since finance charges on your everyday spending cards will signal a need to cut back.
• Use the Snowball Method to Strategically Pay Off Amounts Owed: In order to become debt free at the least possible cost, you should attribute the majority of your monthly debt payment to the balance with the highest interest rate while making the minimum payment required on the rest. Once your most expensive debt is paid off, repeat the process as necessary with the remaining balances.
• Evaluate Your Job Situation: In some cases, all the budgeting and planning in the world won’t be enough to solve your debt problems. You may therefore need to evaluate whether there are higher-paying opportunities out there for people with your background or if you’ll need to acquire some new skills in order to make yourself more marketable. This might require making a bit of an investment in yourself, but as long as you get a worthwhile return it’s money well spent.

Read the complete report, including charts and graphs and past years’ results, here.