Problems with Plastic: Credit Card Debt Hits Record High

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Financially stressed Americans are turning to credit cards in greater numbers, according to the most recent economic data.

Amid the worsening U.S. housing crisis, lenders are tightening their mortgage standards, leaving only the most creditworthy borrowers able to take out new mortgages and tap new home equity lines of credit. That means more and more Americans are racking up record levels of credit card debt to make ends meet—tapping expensive and potentially explosive debt that lenders continue to offer.

Financially stressed Americans are turning to credit cards in greater numbers, according to the most recent economic data. Data released last week by the Federal Reserve shows that Americans’ total credit card debt has reached $951.7 billion—up 8.2 percent from a year ago and the highest amount ever recorded.

This is not good news amid an economic downturn given the already brisk accumulation of credit card debt by consumers over the past six years. As detailed in the recent Center for American Progress report “House of Cards,” between April 2006 and December 2007, inflation-adjusted credit card debt accelerated at a rate four times faster than between March 2001, when the last business cycle ended, and April 2006. This increase compensated for a substantial part of the slowdown in mortgages.

This increase in debt is no surprise. With the costs of almost all basic expenses on the rise, everyday Americans are pushed against a wall. Gasoline prices, for example, have risen a whopping 26.1 percent from March 2007 to March 2008. And since 2001, the costs of food, utilities, medical care, and college tuition have all skyrocketed.

During the housing boom, Americans who owned their homes could cope with these rapid increases in the cost of living by cashing in on rising home prices. But as the subprime crisis slowly unfolded over the past year, lenders have tightened mortgage standards. A survey by the Federal Reserve Board showed that lenders tightened standards in 2007 more than at any point since 1991.

Yet credit cards continue to be pushed by lenders. Some estimate that over 6 billion mailings are sent by credit card issuers to U.S. households every year. Because credit cards have higher borrowing costs than other forms of debt due in part to high fees, many borrowers fall deep into debt.

Already the share of credit card debt that is written off by banks has risen sharply. As uncovered in “House of Cards,” between March 2006 and September 2007, the share of credit card debt that was charged off by credit card lenders rose from 3.0 percent to 4.0 percent.

Increased defaults could unravel the billions of dollars of securitized debt backed by credit card receivables, just as delinquencies in the housing market unraveled the billions of dollars in residential mortgage-backed securities. Just like mortgage-backed securities, credit card debt is packaged and sold to investors. An increase in defaults could lead to losses not just for the credit card lenders, but also for pension funds and investors who bought the debt.

A possible unraveling of the U.S. credit card market and its costs to global financial markets could be partially ameliorated with improved transparency for credit cards. Further, Congress could make it easier for responsible borrowers to avoid fees and surprise rate increases as they come to rely more and more on their plastic. The Center for American Progress has highlighted several solutions as to how this can happen.

Tim Westrich is a Research Associate at the Center for American Progress and the co-author of our most recent report on credit-card lending, House of Cards.

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