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Contrary to popular belief, the recent trend of lower credit card balances is a product of consumers paying down their balances, not charge-offs by creditors. This is according to a TransUnion study that found that consumers spent $72 billion more on their credit card balances than on new purchases between the first quarter of 2009 and the first quarter of 2010.
Let’s put this in perspective for the average credit card holder.
The $72 billion reduction amounted to a drop from $5,776 to $5,165 for the average person. This amounts to $611, which is approximately 10.5 percent of their total balance. This number dropped again in the first quarter of 2011 in which it stood at $4,679 – an amount that is $1,097 (about 19 percent) less than it was 2 years earlier.
It is important to note that this study was based on conservative assumptions.
Had it been based on more loose assumptions, the difference between credit card payments and new purchases would have been approximately $110 billion.
The study also took into account the percentages of credit card holders who had declining balances according to their credit scores. Over half of credit card holders in each range of scores had declining balances. The numbers are as follows:
- Score of 501-550: 53.44 percent
- Score of 601-650: 54.98 percent
- Score of 701-750: 58.97 percent
- Score of 801-850: 58.30 percent
All of this is in line with a Federal Reserve study that shows that debit cards are now the number 1 option for non-cash purchases, putting them ahead of credit cards.
According to Zogby poll that was commissioned by TransUnion in June of 2011, 55 percent of consumers use their debit cards more than half of the time as opposed to their credit cards. Forty-seven percent of consumers said they do so over 75 percent of the time. With this in mind, TransUnion believes that consumers will continue to favor debit cards over credit cards.
Regardless of whether the conservative ($72 billion) figure or the more lax ($110 billion) figure is correct, this is unusual in a nation that has a negative savings rate. What makes this more unusual is that other forms of credit have been less accessible in recent years than in the past.
According to TransUnion’s Ezra Becker, consumers also paid down their debt in other areas over this period.
Are consumers more concerned with the risks associated with debt these days? Whatever the case may be, credit card debt is declining significantly as people feel the economic squeeze.