After decreasing their overall credit card debt by nearly $33 billion in the first quarter of 2011 and leading many to believe that a corner had been turned, U.S. consumers added upwards of $18 billion in new debt during the second quarter of the year, according to a recent credit card debt study. This development begs the obvious question: What gives?
It’s become a pattern that consumers pay down their debt during the first fiscal quarter of each year. The timing of this coincides with tax refunds, annual salary bonuses, and New Year’s resolutions to reduce spending and debt. Almost like a reverse law of gravity, however, what goes down must come back up when it comes to consumer credit card debt because over the past couple of years a first quarter debt decrease has been followed by three consecutive quarters of debt increases. While you might therefore be inclined to chalk up the Q2 2010 spending spree to normal cyclical spending patterns, what we’re seeing now certainly isn’t normal.
Going the right way slower and the wrong way faster
Not only did U.S. consumers add to their credit card debt during the second quarter of 2011, but they did so at an alarming rate, adding 66% more debt than during Q2 2010 and a whopping 368% more than during the same period two years ago. This follows on the heels of a first quarter debt pay down that was 25% smaller than what we witnessed in 2010 and 30% smaller than in 2009.
The bubble’s burst
From the looks of the debt figures, the farther we get from the worst of the economic downturn, the less cautious people are being about their spending habits. The thinking appears to be that we battened down the hatches on our bank accounts and rode out the storm and now we can return to “normal.” The problem is that the lifestyles many of us were able to maintain prior to the Great Recession were far from normal. After all, a bubble by definition is not sustainable, and the housing bubble fueled the incomes of a very large number of people in the United States, from real estate agents to contractors to plumbers to housekeepers to the Average Joe who was able to get a $200K home equity line of credit, and the list keeps on going.
U.S. consumers are hitting the snooze button
The Great Recession was a wakeup call for all of us, but we need to stop hitting the snooze button. Whether you believe that the country is fated for a double dip recession or not, the economy is in a much different state than it was just a few years ago, and we need to recognize this fact. We can’t just revert to pre-recession spending habits, and we need to avoid the self-defeating habit of overleveraging ourselves. People have gotten used to the idea that debt is a fact of life, that if you are only spending within your means, you aren’t spending enough. What we need to get used to instead is always paying for everyday purchases in full and using debt strategically, rather than casually.