Consumer Debt is Down, But What’s the Real Cause?

by Jason Unger

The latest figures from the Federal Reserve show that U.S. consumer debt fell by $11.5 billion (5.6%) in February, with revolving credit down $9.4 billion — the third largest drop during the past 32 years, according to MarketWatch.

This sounds like good news, right? People are paying down their debts and not relying on their credit cards as much, improving their financial situation … right?

Well, while this is hopefully the answer, there’s another possibility.

Buried a bit beneath the headline of the story is this crucial sentence (emphasis mine): “Outstanding debts can fall because consumers paid back more than they borrowed or because lenders wrote down the debt as uncollectable.”

I don’t want to be the guy to rain on the parade, but that last part worries me.

It’s great news if debt is dropping because people have stopped using their credit cards like ATMs and are focused on paying off what they owe, but it’s not as good news if debt has dropped because lenders figured they’d never be able to recover what they’re owed.

Maybe I’m just being a little nervous, especially since the American Bankers Association is reporting that debt delinquencies are also falling (3.19% in the fourth quarter from 3.23% in the third).

But there’s a bit of common sense “if-then” reasoning involved in my worries.

If people are in debt, and if they lose their job, and if they do not have the emergency fund or savings to live off of, then their only option is to dip into their credit and go further into debt.

It doesn’t seem like an unreasonable line of thought.

I hope I’m wrong. What do you think?

Leave a comment below and share your thoughts.

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