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5 ways we've managed to whittle down our credit card balances

September 06, 2011

| Money Rates Columnist

Credit card debt has fallen to a 10-year low as we continue to trim our overall debt and focus on paying down our credit cards.

According to USA Today, the rate of late card payments also fell to its lowest level since 1994, with the credit card delinquency rate--tracking payments that are at least 90 days late--down 19 percent in the second quarter of 2011 from the first quarter and down 35 percent when compared to the second quarter of last year.

The figures come from the credit reporting agency TransUnion, which reported that credit card debt in the U.S. has fallen to $4,669 per borrower--a 5 percent drop from 2010. Cardholders made $72 billion more in payments than they spent in purchases, whereas five years ago consumers were spending $2.1 billion more on purchases than they were making in payments.

In addition to Americans working hard to reduce their card debt, there are four other reasons why credit debt levels have dropped:

  1. Companies are not as likely to approve credit card applications. USA Today said those who make a credit card application are facing greater scrutiny and only those less likely to default are approved.
  2. Borrowers are making card payments before making mortgage payments, USA Today said. TransUnion noted that mortgage delinquencies increased faster than card delinquency as more homeowners questioned the value of making payments on a house worth a fraction of what they owe on it. Prior to the recession and sharp decline in home values, consumers typically made their housing payments ahead of their card payments.
  3. More consumers are using their debit cards instead of credit cards. According to dailyfinance.com, 55 percent of consumers choose debit over credit more than half the time. This could change as banks increasingly institute debit card charges on their customers.
  4. Credit card companies have written off $86.6 billion in delinquent accounts. The companies typically write off an account when it is more than six months past due.

Card interest rates don't appear to be much of a factor in the declining card debt. According to thestreet.com, the annual percentage rate on credit cards was 14.15 percent in late August, up from 11.64 percent more than two years ago.

Although credit card rates are partly driven by the prime rate, which is being kept low by the Federal Reserve, the rest of rate is determined by the risk posted by those who apply for credit. The best credit card rates and low-rate credit cards typically go to customers with the highest credit score.

That said, in an unstable economy, credit card issuers may try to boost profits by reducing their approvals of those who apply for credit or increasing interest rates on all their customers--something they can do provided they give cardholders adequate warning.

USA Today reported that households in general are carrying less debt, with total consumer debt--including mortgages, car loans, student loans and credit card debts--falling $50 billion to $11.4 trillion in the second quarter.

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