Consumers’ credit card debt eases – Omaha World-Herald

KENT SIEVERS THE WORLD-HERALD

Published Thursday January 26, 2012

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For an economist, an increase in credit card debt can be a positive development, indicating more consumer confidence and spending that will help the economy grow.

For college student Amber Malone, credit card debt can be a trap.

“Credit cards are from the devil,” she said this week. “No one educated me on the reality of a 24 percent interest rate.”

It took four years, but Malone has worked her way out of her credit card trap.

And over the past year, the average U.S. credit card debt is down 11 percent, according to a national debt report, while average home mortgages and auto loans edged up and student loan balances declined.

It remains to be seen whether the drop in credit card debt is a temporary shift in consumer behavior or more long-lasting.

Consumer debt is “both kind of a blessing and a bad thing in the same sentence,” said Ken Lin, CEO and founder of CreditKarma in San Francisco, which tracks debt trends through its data base. “If you’re a consumer you might want it to go down a bit, but if you’re wanting economic growth you’d hope it would go up.

“Consumers still aren’t spending quite as much as pre-recession, and consumer confidence is still a little bit lower than we’d like it to be. But we’ve had a little growth in consumer spending. We want to have the economy grow, but we don’t want the growth to be on debt.”

Consumer spending makes up about two-thirds of the nation’s economy, so changes in consumer spending affect the nation’s overall economic health.

CreditKarma’s data shows that consumers in Nebraska and Iowa trimmed their average credit card and student loan balances in 2011, while average mortgages increased. Auto loan balances were up in Iowa and down in Nebraska.

In Omaha, average credit card and auto loan balances were higher than the U.S. average, while the average auto loan was 1.3 percent lower and the average mortgage 28 percent lower.

Malone learned the hard way about credit cards, starting with a $ 300-limit “student” card when she entered the University of Nebraska at Omaha. At first, the music education student paid it off every month and the limit kept going up. Before long, the balance was $ 3,500, and she could afford to pay only the monthly minimum.

In two years, she managed to reduce the balance by only $ 700, and she realized it would take many years to pay off. Her grandparents co-signed a loan with a 2 percent rate, and it took another two years to repay that by working extra hours, which slowed her progress toward graduation.

Now her credit card and its debt are gone, but in the meantime she has accumulated a student loans that will come due after graduation. “That’s hovering over me,” she said.

Scott Rick, an assistant professor of marketing at the University of Michigan, said revolving debt, including credit cards, declined during the 2008-2009 recession.

“Part of that was less credit being handed out, and partly more responsible repayment and credit usage behavior,” Rick said. “But it’s hard to keep spenders down. I would not be surprised if it starts to pick up again.”

If credit card debt increases too rapidly, he said, “I have concerns for debt holders themselves. There’s plenty of evidence to say it’s not good for them on so many levels. Debt has a psychological cost and a physical cost. Debt actually predicts your physical well-being and how vulnerable you are to various diseases,” and can undermine personal relationships.

Consumers already may be using their credit cards more, even though their balances are down. The Strawhecker Group of Omaha, which tracks card transactions, said credit card spending totaled $ 358 billion in the third quarter of last year, up from $ 289 billion in the first quarter of 2009. Consumer spending overall totaled $ 10.8 trillion in the third quarter last year, up steadily from $ 9.8 trillion in the first quarter of 2009.

Lin, from CreditKarma, also said he expects credit card debt to increase, perhaps by about 10 percent this year.

As for other types of consumer debt, average student loan balances were down in 2011 after growing the previous few years as more people went back to school during the recession, Lin said. In addition, colleges raised tuition because many states were strapped for cash and had to cut tax support for higher education. An increasing number of for-profit colleges also tapped into the student loan market, he said.

Mortgage loan balances have been trending downward for the last four years because of several factors, he said.

Some people are able to pay down their mortgages to reduce their debts and monthly payments. Others have lost their homes due to foreclosure or walked away from houses that became worth less than what they owed.

And since home prices have declined, people have to borrow less when they buy.

Lin said geographic differences are coming into play. Because housing prices were lower and have declined less in the Midwest than in states like California, Florida or Nevada, people are under less pressure in the Midwest to pay down their total debts, Lin said. “If home prices are relatively steady, people don’t feel that pressure to pay down that debt.”

As for UNO student Malone, she can foresee the day when she might get another credit card.

“Maybe when I get a real job,” she said. “You have to have a plan to pay it off.”

Contact the writer:

402-444-1080, steve.jordon@owh.com

twitter.com/buffettOWH

Nebraska and Iowa consumer debt

Omaha, 2012 U.S. average

Source: CreditKarma.com

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