Rise in bankruptcy filings leads to drop in credit card debt

Credit cards are a nearly ubiquitous presence in today's consumer economy, and many people in the Chicago area use them on a daily basis to meet ordinary expenses. While credit cards are exceedingly convenient and offer a variety of rewards, there is no such thing as a free lunch. Most people recognize that elevated interest rates can rapidly grow an unpaid balance into high credit card debt. What may come as a surprise, however, is that credit card debt has fallen in the past few years, a time of falling salaries and stubborn unemployment, according to a Federal Reserve study.

The cause is related our nation's recent economic troubles, though it may not be immediately obvious. More consumers have filed for personal bankruptcy, which has helped them eliminate credit card debt. In 2007, on the cusp of the Great Recession, approximately 822,000 people across the country filed bankruptcy petitions. By 2010, that number had nearly doubled to 1.5 million.

Over the same time span, the Federal Reserve study shows a noticeable drop in the number of families with credit card debt and, in those families with debt, a reduction in their average debt load. Bankruptcy gave many of those families the fresh financial start they needed after being swamped with debt.

Bankruptcy does have its consequences, however. Lenders may be unwilling to extend credit to you, and one economist has suggested that some of the drop in median credit card debt may be attributable to fewer card applications being accepted by credit companies. On the other hand, fewer consumers may be requesting cards as well. The economist also argued that the lessons of the past few years have made people more cautious about taking on high consumer debt.

Source: NPR, "Credit Card Debt Cut: The Reason May Surprise You," Marilyn Geewax, June 12, 2012.

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