The Main Reasons for a Huge Increase in Credit Card Debt

Not surprisingly the Wall Street and federal government economic experts claim the increase in credit card debt is a clear sign that business is improving in the country.

They point to increased purchases of autos, mobile homes and tuition with credit cards as a sign of an upswing in consumer confidence and a return to optimistic outlooks.

Even the most optimistic experts are not predicting a rapid return to a booming economy or a fast increase in available jobs. Debt on revolving credit accounts rose by 3.5% ($2.3 billion) and that debt now totals $800.5 billion in the U.S. Consumer credit debt overall increased by 3% ($6.1 billion) and now totals $2.41 trillion.

What Does This Mean?

Economists are touting economic recovery but seem to be hedging their bets as they caution that lost jobs will not be returning quickly and that the economy seems to be rallying "for now".

One reason for the huge increase of debt may be that lenders have finally begun to ease up on restrictions.

Since the credit market began to collapse in early 2007, lenders have been reluctant to grant loans and increased spending limits on credit cards for all but the best qualified applicants.

When the markets took a sudden deep decline in 2007-2008, credit card lenders reacted quickly to remove many of their credit offers from their websites.

There was a one-two punch as the declining economy was quickly followed by new rules that were imposed on credit lenders to protect consumers.

The credit card market for the average consumer almost ground to a halt. Interest fees were drastically increased prior to the new rules becoming law.

Reduced Spending Limits

Spending limits were reduced and a frightened populace was reluctant to add more debt in a time when hundreds of thousands of jobs were being lost.

More cautious financial experts point out that much of the increase in consumer debt may be due to lack of cash. Cars wear out and must be replaced.

We don't know if the surge of spending during the Christmas holidays was due to increased optimism, replacement of outgrown clothing and outdated appliances or to frustration at being on tight budgets for several years.

When tuition is charged to a credit card it may indicate lack of availabe student loans or to the person's inability to qualify for a student loan.

Higher Education

It has been documented that thousands of workers who lost jobs chose to return for more education when they were unable to find other employment. Higher education would hopefully make the person more competition in the job market.

Of great concern, however, is the mounting student loan debt that has become a common part of the graduation ceremony for so many students. Student loans are debt that must be paid eventually.

They cannot be dismissed by bankruptcy and the payments can be enforced through the courts. It is not uncommon today for a student to graduate from college with $100,000 of student loan debt. For someone receiving advanced training in the law or medicine, that figure can be much higher.

Student loans are readily available even in a tight market as the traditional thinking is that a degree or an advanced degree will carry a higher salary expectation and thus the loan can be repaid. In today's job market, that type of thinking is being questioned by some people.

If you are entering a profession such as law or medicine, it's likely you will generate income sufficient to pay off student loans.

However, if your specialty is in a lower paying career such as teaching or social work, student loan debt could cause major financial problems for you through many years of your new career.

Alternate Views

More skeptical experts question whether the increase in consumer debt that has become apparent in the past few months is a true indicator of an improvement in the overall economy of the country.

Consumers are weary of budgets cut to the bone and tired of worrying about the economic outlook month after month for several years. There is concern that the spending may not be justified by increased income or job creation but by frustration of consumers who are tired of doing without.

Another possibility is that at least some of the debt may be people who are resorting to charging necessary living expenses as a last resort. We hear of those who live from paycheck to paycheck and they are the first to be financially stressed by economic problems.

However, there are many people who have significant savings and investments that can used as emergency funds to pay for living expenses over many months.

It is likely that some of the increased debt is from people who have simply run out of savings and are trying to maintain their lifestyle until the job situation improves.

Summary

There has been a huge increase in debt and this comes after two years of declining debt as people tried to pay off debt or dismissed credit card debt through bankruptcy after losing their jobs.

If the increase in spending continues, it may well be a sign of an improving economy. It is equally possible the spending may lead to further financial stress for budget-weary consumers.

I also recommend you to check out our guide on no credit check credit cards and whether they fit your needs.