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| The Basics | The truth about credit card debt
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Conventional wisdom is that were all hooked and struggling. The reality is, in fact, quite different and much less frightening.
By Liz Pulliam Weston
Youve probably heard that the average American carries more than $9,000 in credit card debt.
Its a figure frequently cited by politicians, journalists and pundits as a sure sign of (take your pick) moral decline, consumer gullibility and/or impending economic collapse.
Here's the thing: The statistic is wrong.
- In reality, most Americans owe nothing -- zero, zip, nada -- to credit card companies.
- Half of the U.S. households that do carry balances owe $2,200 or less.
- Among lower-income households -- the ones who may be most vulnerable to the negative repercussions of credit card debt -- the percentage with credit card balances has actually declined.
These figures are from the Federal Reserve's latest Survey of Consumer Finances, one of the most comprehensive assessments of what Americans own and owe. (The survey is updated every three years, but it takes a while to compile the data; this most recent version is a snapshot of our finances in 2004.)
Overall, we do owe about 10% more on credit cards than we did the last time the figures were compiled in 2001. But our balances are obviously nowhere near as high as is commonly believed, and they never have been.
Averages dont tell the tale
Most of the people citing the $9,000 figure credit it to CardWeb.com, a service that tracks credit-card trends.
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CardWeb, however, doesnt contend that the average American owes more than $9,000 on cards. Their statistics show that the average debt per American household with at least one credit card was $9,312 for 2004, the last year for which figures are available.
To get that number, CardWeb divides the total outstanding credit-card debt at the end of year -- including business balances and balances that are about to be paid off -- by the number of households that it says have at least one credit card. (CardWeb uses a slightly different definition of household than the Fed does. And the company contends that 80% of households, rather than the Feds 74.9%, have at least one credit card.)
If you know anything about statistics, however, you know that averages dont really tell the tale.
Consider what would happen if you and 17 of your friends and family were in a room with Bill Gates and Warren Buffett. The average net worth of a person in that room would be north of $4 billion. The fact that everybody elses personal net worth was just $100,000, or $1 million, or even $10 million, wouldnt affect the average that much because the big boys are sooooo much wealthier than you.
Take heart: Were actually frugal
In much the same way, a relatively small population with huge credit card balances can skew the average to make it look like the typical American is carrying a much bigger debt load than he or she actually is. Consider:
- 25.1% of American households have no credit cards at all -- no bank cards, no retail cards, nothing.
- Another 31.5% of the households the Fed surveyed paid off their most recent credit card bills in full.
- So together, the households that owed nothing on credit cards equaled 56.5% of the total.
Of the households that did carry a balance, the median amount owed was $2,200. That means half of the households with a balance owed more, and half owed less. (Medians are less subject to the skewing phenomenon that plagues averages; thats why economists tend to favor them.)
Interestingly, the percentage of families carrying balances actually declined in some of the most economically vulnerable groups: those with low and moderate incomes; young adults; nonwhite or Hispanic families; and renters.
Where balances really ticked up was mostly among the households with higher net worth and higher incomes. For example, 38.5% of folks with incomes in the top 10% had credit-card debt, compared with 33% in 2001. The median amount owed was $4,000, compared with $3,000 three years earlier.
Is life getting tougher at the top? I doubt it. More likely, many of these top earners were taking advantage of the 0% and other low-rate teaser offers that started becoming popular during the 2001 recession. Using such "free" money to buy stuff, pay off higher-rate loans or even to invest can be a reasonable strategy when you have plenty of cash available to pay the debt when the teaser rate expires.
Credit-card debt can be a much bigger deal when you're living with fewer resources. A surge in interest rates, for example, easily could cause your debt burden to surge to unaffordable levels when you're already stretched.
We dont carry that much debt
You might question whether debtors are lying en masse to the Fed and disguising debt burdens that are really much higher.
While that's always a possibility, it's rather unlikely, given the large size of the interview pool (4,522 interviews in the latest survey) and the amount of time devoted to each (an average of 80 minutes, usually conducted in person). Folks who sign up for these interviews are agreeing to bare their financial souls, not swat away some pesky telephone-survey taker who's keeping them from the latest episode of American Idol. (If you want to read more about the Fed's methodology, you'll find it at the back of the report (.pdf download).)
But if you need confirmation, consider that Fair Isaac Corp.'s review of millions of credit reports shows much the same trends.
There are a few differences between the universe the Fed examined and the one looked at by Fair Isaac, creator of the FICO score. For one thing, credit reports are individual -- theres no such thing as a household or even a joint credit report. Also, you have to have and use credit to have a credit report. Finally, credit reports dont typically distinguish between balances you pay off and those you carry each month.
But again, Fair Isaacs statistics show a world in which most people are light-to-moderate users of credit:
- About 40% of credit card holders show balances of less than $1,000 on their cards.
- About 15% have total card balances in excess of $10,000.
- When all non-mortgage debt is combined, 48% of consumers carry less than $5,000 of debt.
Still looking for trouble? Here you go
Does this mean all the hand-wringing over consumer debt is so much noise? Hardly.
- Debt burdens have been climbing. Our "leverage ratio" -- the median value of what we owe compared with what we own -- is 24% higher than a few years ago. (It was 12.1% in 2001 and 15% in 2004.) When you exclude families who are completely debt-free, our leverage ratio is substantially higher: 19.9%, a 3.4-percentage-point increase from 2001.
- The percentage of disposable income used to pay debts is still near record highs.
- Bankruptcies set another record in 2005, with 2 million personal filings as filers rushed to beat the implementation of the bankruptcy reform law. Filings dropped precipitously after that, but are once again ticking higher.
All of that is more than enough evidence to suggest that a large number of people are overdosing on debt. The average American, though, seems to be doing just fine.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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