Drop in Credit Card Debt Reveals Ongoing Hardship

woman worried over credit card debtWe recently told you about a handful of cities across the country where credit card debt has continued to rise, despite the recession. Articles like this one also highlight the cities where revolving debt is highest, sometimes accounting for as much as 17% of the average income in an area.

Interested in the other side of the story -- are there any places where credit card debt has fallen? -- WalletPop contacted the credit bureaus Experian and Equifax and asked them to share any information they had on U.S. cities where credit card debt had decreased the most last year.

We also asked a credit expert to weigh in on what the data means about our economic status as a nation -- and the news ain't good.According to data from Experian, Americans' average credit card debt went down a bit overall, although there are still some parts of the country where debt is still on the rise. "As a result of the economy, a lot of consumers have become more conservative," says Maxine Sweet, vice president of public education for Experian.

As it turns out, though, there might be other factors driving those numbers that paint a less-rosy picture of our economy.

According to Experian, the amount of the average credit card debt dropped by more than 5% in 48 municipalities. Nearly half were in the South or Southwest, where the fallout from the real estate implosion has been severe. John Ulzheimer, president of consumer education for SmartCredit.com, says this reveals a few troubling implications.

"I'd love to think that consumers consciously tried to make significant efforts to pay down their credit card debt," says Ulzheimer, "but I think some attribution has to be given to the fact that housing values are so bad that consumers may have redirected payments from mortgages to credit card debt."

Ulzheimer might be onto something; recent news reports citing data from TransUnion, the third big credit-reporting bureau, shows that people are, in fact, blowing off their mortgages and paying their credit card bills instead.

While much has been made in the media of so-called "strategic defaulters" -- people who just blow off their monthly mortgage payment because they can -- Ulzheimer says the choice to pay credit cards instead of housing reflects the calculations of a population that's still engaged in a day-to-day financial struggle to stay afloat.

"It seems the discretionary dollar is going toward the credit card debt vs. the mortgage," Ulzheimer says. "Credit card issuers don't give you a long time before they'll consider the account in default." And unlike foreclosure actions, he points out, "they don't have to go through the judicial process. It takes 12 to 18 months in some cases for them to kick you out of your house."

In the meantime, people can at least continue to have access to their cards, which is important for people on the financial brink. "You don't want to lose access to your capital because, frankly, you can't buy groceries with your house," Ulzheimer offers.

In addition to this sobering observation, Ulzheimer says there's also a possibility that the drop in credit card debt observed in parts of the country where the real estate crisis is most severe -- places like Las Vegas and West Palm Beach, Fl. -- may have been due to actions taken by the issuing banks, who were spooked when consumers' access to home equity (an "escape hatch" for paying off mounting credit card bills) evaporated as home values plummeted.

"Credit card issuers, especially in the areas that were hit very hard by the housing crisis, were lowering limits and forcing consumers to pay down debt aggressively," Ulzheimer says. Finally, some reduction in credit card debt is probably attributable to issuers writing off or settling balances that have defaulted.

Interestingly, Equifax showed that the two biggest debt-shedding cities were New York City and Los Angeles. An Equifax spokesperson, though, says that the data doesn't control for people moving out of certain areas. In other words, it could be possible that people fleeing high-priced cities could be responsible for some of the drop.

All but one of the remaining Equifax cities were in the South and Southwest, mirroring Experian's data. In both data sets, parts of the Midwest showed up, too. Equifax's third-biggest drop was in the greater Chicago area, while Experian's largest debt loss was Fort Wayne, In., with a 24% drop.

Experian's Sweet says all of us, whether we live in high-debt location or not, should try to whittle those balances down. So if you're getting a tax refund in the coming weeks, consider putting it toward your debt. Since it will reduce the amount of interest you pay, it's really the easiest way to pay yourself back for your money-saving efforts.

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