Charge! : Are millions of Americans charging into financial disaster? Credit card levels approach recession numbers

“They learned nothing and they forgot nothing.”
(What was often said of the Bourbon kings, some of the worst monarchs in European history).

Millions of Americans are acting like Bourbon kings. They may have remembered the financial crisis of 2008—and the huge number of consumer defaults that followed it in the next year—but they apparently learned nothing from it, even though many of them couldn’t pay their credit card bills.

Playing with Fire

That’s because consumer debt, based in part on holiday season, is moving toward its highest point since the recession, according to a new study by ValuePenguin, a New York based financial research company.

“Total outstanding revolving debt is expected to hit over $930 billion—the highest it’s been since 2009,” wrote Robert Harrow, a research analyst with ValuePenguin.

Revolving debt consists of open-ended accounts with variable interest rates and pre-determined credit limits. Examples are credit cards, home equity lines and personal lines of credit.

The average household debt of Americans is now some $5,700, with the average American carrying $2,300, according to the ValuePenguin report, “Average Credit Card Debt in America: 2016 Facts & Figures.”

These numbers, which are based on the latest Census Bureau and U.S Federal Reserve Board reports, include both those who pay off their card debts each month—transactors—and those who carry credit card balances from month to month. The latter are known in the card industry as revolvers. They remind me of people who are playing Russian Roulette with their financial and mental health.

Some Bad Trends

The report found some disturbing trends. Those who are the most vulnerable to missing payments—-those with little to no net worth, those who often pay interest rates of as much as 15 percent to 17 percent on their card balances—tend to owe the most.

For instance, in the case of the revolvers, the card balance carried is more than twice as high as the national household average—some $15,779, according to the report. It also said that those households with the lowest net worth—zero or negative—hold an average of $10,308 in card debt.

“There’s no denying that the individuals with few assets are the ones drowning in credit card debt,” Harrow said.

“It’s hard to accurately predict what portion of this population has a low net worth, and is therefore reliant upon credit cards to pay for day-to-day expenses, or whether individuals with low net worth find themselves in this situation because they rack up high balances, and then default on their loans,” he added.

“Either way, it’s an unfavorable situation,” Harrow said.

Exactly.

How Bad Is it?

“You know you’re in trouble when all you can do is pay the minimum on card bills,” added Charles Hughes, an advisor in Bay Shore, New York.

Hughes advocates paying the highest interest rate cards first and also trying to develop a cash reserve so revolvers can eventually become transactors.

Going by region in the United States, the ValuePenguin report also found that the regions with the highest household card debt tend to be in the Northeast and West Coast, both well above the national average at some $8,000. At the current increasing pace, Harrow says revolving debt could pass the pre-recession level of $1 trillion in about 18 months.

Why are the numbers significant?

Two in Five Do the Wrong Thing

About 40 percent of American households carry revolving debt. During the recession millions of out-of-work Americans could no longer pay card balances. That had several consequences.

Delinquencies hurt cardholders credit ratings. That hurt retailers when many could no longer buy their products. This contributed to an economic slump that hurt the big banks. Chase, Citi, American Express all took big losses in 2010 when default rates rose.

Big Banks: We’re not Worried

However, big banks—some of which almost went the way of the Bourbon kings in the last crisis—now say they are more careful. A banking industry spokesman said that most cardholders—with the exception of those who are running up big debts and have no assets—are managing credit effectively.

“We are seeing more transactors. And card delinquency rates are quite low at only 2.54 percent,” said James Chessen, chief economist for the American Bankers Association (ABA).

That number, he adds, compares favorably with a 15-year average card delinquency rate of 3.74 percent. It is also far below the high point of card delinquencies, which was 5.01 percent in the second quarter of 2009, according to the ABA.

The biggest causes of card payment delinquency, Chessen says, are unemployment, health care costs and divorce.

Maybe people who ran into disaster have learned.

Maybe big financial institutions have learned.

Maybe I’ll stick to one beer at dinner instead of four.

Maybe not.

We’ll know for sure in the next recession. That will inevitably come sometime, possibly soon. But one way you prove that you are not a Bourbon is simple: Don’t be a revolver.

Pay off card bills every month. Avoid the outrageous interest charges that card issuers are only too happy to collect. Do something the Bourbons didn’t do: Learn.

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.