Initial reports from the financial markets last week would seem to bode well for the consumer economy: according to syndicated columnist Michelle Singletary, Americans appear to be paying down the balances on their credit cards.
Trans Union said that average balances on bank-issued cards had dropped for a fifth consecutive quarter.
CreditKarma reported that consumer debt was down 3 percent since January.
But Singletary says the devil is in the details.
Much of the drop may actually be attributed to charge-offs — when card companies give up on their debtors and sell the debt to a collection agency. This often happens when accounts get 180 days behind in payments.
The analysis found that credit card debt for the second quarter of this year decreased by about $12 billion compared with the previous quarter. But banks charged off $21.8 billion during the same period. Given that the drop in outstanding debt is smaller than the dollar amount that was charged off, the difference of $9.8 billion is the amount of debt consumers accumulated.
The charge-offs indicate that many banks are continuing to experience deep losses, and this is one of the reasons why credit is still tight.
Singletary thinks this is just the skeptical look we need. Too many people are still leaning on credit in these lean times.
By Doug Beaton