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Credit Cards – The Trigger For The Next Big Crash?

by Chris Poindexter

The news is bad when it comes to credit card debt but buried in that news is a glimmer of hope for the future. First here’s the bad news. According to CardHub’s Q2 2014 debt survey, Americans are running over the plastic at a record pace, racking up nearly $28.5 billion in debt in just one quarter. That’s a jaw-dropping 66% increase over Q2 2013. Wow.

As debt increases, it’s inevitable that some people will get themselves in trouble, so charge-offs also tend to go up along with debt and 2014 is sadly no different in that regard. CardHub projects a whopping $30.5 billion in charge-offs for all of 2014. That’s more than a quarter’s accumulated debt, representing nearly a third of new debt for the year. That’s a lot of ruined financial lives and those big numbers are being posted by a default rate that’s near its historical low.

The pain doesn’t stop there; by the end of the year the average household is expected to be carrying nearly $7,000 in revolving debt, the highest since the dark employment days of 2010. That means the average consumer will only be $1,300 away from the “debt tipping point” in their personal financial world; that’s the point where they can’t make the minimum payment and defaults skyrocket.

The data paints a picture of a big reversal in the financial lives of the average family. In the years immediately after the big crash, people tightened their belts and used plastic sparingly. Even as card use started to expand again in 2011 and 2012, most families would hunker down after they got those eye-opening post holiday bills and pay down balances in Q1 of the next year. Only that didn’t happen this year. Feeling good about job security and confident in seeing a raise, an increasing number just let the balance ride.

Increasing consumer debt and higher card balances are a ticking time bomb in the economy, which is still two-thirds driven by consumer spending. In fact, the debt balances would seem to indicate that the blowout Q2 we just saw, and Q3 numbers that are shaping up to be nearly as good, may have been at least partially fueled by expanding consumer debt.

It’s somewhat obvious to suggest that we simply can’t sustain this level of debt and we can’t keep posting balance increases. People are either going to suddenly wise up en mass and pull back on spending, or hit the wall represented by the tipping point where they can no longer afford their own balances. When a major component of economy decides it’s done spending, that’s going to ripple through the rest of the economy like wildfire. Consumers are the geese laying the golden eggs in a market-based economy and if the geese can’t afford to eat, there won’t be any eggs. A sudden pullback in spending will trigger massive layoffs, which sets up a downward spiral which could easily become the trigger for a major crash.

A sudden retraction in consumer spending might not be as imminently fatal as a credit market freeze, it could have a profound and long-term impact on the economy. Since credit card debt is harder to discharge in bankruptcy court, we could see the creation of millions of zombie households. Saddled by debt and sidelined from spending for decades, they could represent a long term drain on the economy.

The glimmer of hope is that young people, 18-29 years old, appear to be getting it. Spending their formative years watching their parents struggle with debt a full 63% of young adults in that age bracket don’t have a credit card at all. That’s really good news and, ultimately, is what could keep a soft decade from becoming a repeat of 1929 stock market crash. If we make it through the pending consumer debt crisis, you may well be able to thank the kid next door who used to mow your lawn for extra cash.

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