Consumer Credit Card Debt Declines
The Federal Reserve compiles a monthly report of consumer credit statistics. The January 7, 2005 Federal Reserve consumer credit report indicates that overall consumer debt fell at a 5% annualized rate in November, a reduction of $8.7 billion.
A sharp decrease in revolving debt accounted for more than 80% of the November debt cutback. Revolving credit card and charge card balances decreased $7.2 billion for the month at an 11% annualized rate.
The remaining $1.5 billion debt crunch resulted from balance decreases in non-revolving credit accounts. Non-revolving credit includes non-mortgage, closed-end loans such as personal loans, auto loans, and student loans.
The $8.7 billion decrease in consumer debt levels came as a bit of surprise. Economists were projecting an increase of approximately $6 billion dollars for the month. The decrease is the largest on record since the Federal Reserve began keeping track in January 1943.
While the November decrease in consumer debt may appear to be a departure from the overall trend of increasing debt levels, remember that appearances can be deceiving. The Federal Reserve consumer credit report does not include any loans that are secured by real estate. Mortgages and home equity loans are excluded from the calculations.
Many consumers consolidate their credit card debt into lower interest-rate home equity loans. Since the Federal Reserve excludes this type of loan from its calculations, the report does not present an accurate picture of debt levels. Credit card debts that are restructured as home equity loans do not appear on the report. When this happens, consumer debt levels appear to decrease. In reality, they are simply swept under the rug.
A more accurate view of overall debt levels can be gleaned from the Federal Reserve’s quarterly Household Debt Service and Financial Obligations Ratios report. This broad report shows mortgage debt increasing and consumer debt decreasing over the past several years, supporting the idea that consumers are trading credit card debt for mortgage debt.
In general, the best way to repay consumer debt is to pay it off as quickly as possible at the lowest available interest rates. Home equity loans are a mixed bag; they have the potential to increase overall debt. Home equity debt consolidation loans typically offer lower interest rates than credit cards. However, the repayment period is much longer. The longer repayment period can cancel out the interest rate savings and incur thousands of dollars in additional interest charges. Given the potential pitfalls, consumers should always consult with a financial expert to evaluate the merits of home equity loans before opening a home equity debt consolidation account.
