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Thursday, May 04, 2006

Trend: Bankrupt!: Debt Freedom Rings


Are we paying down our credit card debts?

Federal Reserve reports that the increase last year in credit card debt and other types of revolving credit was just 2.6 percent, the smallest increase in 23 years (lemme be clear: debt is still increasing - just less-ish). Hmn. Why?

Since my first post on Debt, I've taken a look at reported first quarter earnings - and some of the largest credit card issuers report surprising downturns.

In 1st Quarter’06 Citigroup, J.P. Morgan Chase, Cap One and Amex reported unexpected decreases in outstanding loan balances from U.S. consumer cards. We seem to be paying it down-ish.

•Citigroup showed noticeable declines in "traditional credit products" in the U.S. market, due to "increased payment rates."
(CNNMoney.com and ConsumerAffairs.com)

•JP Morgan Chase showed declines due to "narrower loan spreads as cardholders paid off more and more of their debt.”
(CNNMoney.com and ConsumerAffairs.com)

•Capital One Financial Corp. showed declines “due to the sale of certain charged-off debt, and an improvement in credit quality following the spike in bankruptcy filings last year.”
(CardForum.com)

•AmEx also reported a reduction in finance-charge revenues “because cardholders paid off their bills faster than expected.”
(CardForum.com)

And back in 2005…
•MBNA and Capital One found that "results were further impacted by unexpectedly high payment volumes from U.S. credit card customers," and that "the payment volumes were particularly higher on accounts with higher interest rates.”
(NPR.org and MSN/Slate.com)

According to Dow Jones' MarketWatch, officials at JP Morgan and Citibank admit that these timely payments of outstanding balances present problems for the banks.



Analysts propose this trend may be driven by a combination of exploding gas prices, increasing interest rates, and the tough new bankruptcy laws.

Also a 2005 mandate from the Office of the Comptroller of the Currency now requires banks double the mandatory minimum payment on credit card balances, in order to push consumers to pay off their debt.

Analysts also offer the fact that Americans have stepped up borrowing through home equity loans rather than increasing credit card debt.




But might these be flukes? Can consumers even make good on these starts?



Some polls imply that we have all the best intentions to continue to take steps to reduce credit card debts:
•84% say they are likely to reduce credit card debt in 2006
•7% have a more pessimistic outlook, believing it's "not at all likely" they'll reduce credit card debt
(Experian-Gallup Personal Credit Index, January 2006)

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