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Declining Debt from Charge-Offs, Not Pay-Offs

Americans have been patting themselves on the back for their new-found restraint, thanks to statistics that indicated we've paid off nearly $100 billion in credit card debt over the past year. It turns out, we shouldn't have been so proud.

A new analysis of credit data indicates that Americans have paid off only about $10 billion--or less than 10% of that total. The rest of the decline in debt came from charge-offs, not pay-offs, according to Odysseas Papadimitriou, chief executive of, a credit card shopping site.

Skeptical that Americans could prove so thrifty at a time when unemployment was soaring, CardHub examined quarter-over-quarter and year-over-year changes in both revolving credit and bank charge-off rates. Both figures are published by the Federal Reserve Bank.

When diving more deeply into these statistics, Papadimitriou found that $83 billion of the $93 billion that Americans supposedly paid off was actually written off by banks as bad debt.

In fact, the only time that people were legitimately paying down their debt was in the first quarter of 2009, he said. After that, people were charging as much or more than banks were charging off. That makes the "new normal" that we've been hearing so much about sound a lot like the very troubling "old normal."

Papadimitriou says it's too early to tell if that's a fair assessment, though.

"It's not necessarily that people haven't learned their lesson about debt," he said. "But when you don't have a job, it's pretty difficult to come up with the money to pay down your debt."

The unemployment rate and the charge-off picture have both improved a bit over the first few months of this year, he noted. But the Fed hasn't yet released the necessary data to determine whether the continuing decline in outstanding debt is now from repayment or just more charge-offs.

What consumers do with their debt over the coming months will reveal whether the recession traumatized people into better behavior, or if American consumers brushed the dust of this recession off their designer boots on welcome mats at the mall.

"The jury's still out," said Papadimitriou.

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