The substantial drop in credit card debt in the United States since early 2009 has been widely attributed to newly frugal consumers. But analysts say a significant portion of the decline is actually the result of financial institutions writing off billions of dollars in credit card debt as losses.
While consumers have done their part, by shying away from exceeding new credit limits and turning increasingly to debit cards, the question is how much consumers are voluntarily reducing their balances and how much banks are making the decision for them.
The answer has wide implications for the broader economy as banks try to determine who to extend credit to -- and how much -- and as businesses try to adapt to the changes in consumers' spending patterns.
"There is a lot of debate going on right now among economists," said Cristian deRitis, the director of credit analytics with Moody's Analytics, which is studying the issue. "Is there truly de-leveraging or are charge-offs removing a lot of balances?"
Kenneth J. Clayton, senior vice president for American Bankers Association card policy, said the impact of tighter credit was working its way through an economy in which consumers continue to feel the effects of joblessness, lower incomes and declining housing values.
"It has a braking effect on the economy, and the key thing is to get to the right balance," he said. "We are in a process right now of finding that balance."
Consumer debt has been steadily falling over the past couple of years. The Federal Reserve said last week that household liabilities -- including mortgages, credit card accounts, and non-revolving accounts like auto loans -- totaled $13.9 trillion in the second quarter of 2010, down $200 billion from the same quarter a year earlier. Outstanding revolving accounts, mostly credit cards, declined to $832.2 billion from $915 billion in that same period, the Fed said in a separate report earlier in the month.
But economists said they are trying to calculate how much of the drop in credit card debt is due to banks writing off -- charging off, in industry parlance.
DeRitis, of Moody's, said he was examining the credit card accounts of individual borrowers. He said he hoped to answer which borrowers are voluntarily paying down their debt, which are taking on new debt, and to what extent existing borrowers are curtailing balances by paying more than the minimum required.
While the study is not yet complete, deRitis said it appeared so far that most of the overall decline is in the form of charge-offs.
"There clearly is a differential impact with defaulting borrowers having greater difficulty finding credit in the future," he said. "Non-defaulting borrowers are reducing their overall credit exposures, but not at an especially rapid pace, given stagnant incomes and wealth."
"Bottom line -- we are becoming more of a polarized set of consumers," deRitis added.
Another study, released last week by Evolution Finance's CardHub.com, calculated that financial institutions charged off about $20 billion each quarter of 2009 through early 2010, about equal to the amount of the decline in outstanding credit card debt.
"This study's findings give real insight into how seriously the recession crippled consumers with credit card balances," Odysseas Papadimitriou, the chief executive officer, said. "These write-offs also indicate that many banks are still experiencing deep losses and are still in serious trouble."