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What’s missing in card stats

By Janna Herron ·
Thursday, September 13, 2012
Posted: 5 pm ET

Americans are carrying less credit card debt than just a month ago, according to two new figures.

The Federal Reserve said Monday that revolving balances, also known as credit card debt, fell to $850.7 billion in July from $855.5 billion the month before. on the same day offered even more up-to-date stats. Credit card debt for the average U.S. cardholder slipped 1.4 percent in August to $5,403 from $5,480 in July.

The reasons, of course, are debatable. Some experts say it's good that Americans are paying down their debt, showing fiscal responsibility. The other, louder camp is saying that U.S. consumers are feeling crappy about the economy and are scared to charge too much.

What's interesting about these numbers is they fail to tell us about the balances of so-called revolvers -- that is, people who carry credit card debt from month to month. This kind of consumer is lumped into the average with others who pay off their entire balance every month and avoid accruing interest.

Debt from revolvers reveals a lot about the health of the economy. If their balances are growing, it's probably because stagnant wages, job losses and other factors are forcing many Americans to put their expenses on credit, without the ability to pay it back.

The last good estimate on revolvers is from 2009. The Boston Fed's Survey of Consumer Payment Choices that year found that 40 percent of consumers carried unpaid balances at least once in the previous 12 months. On average, each revolver carried $7,654 in unpaid balances.

That's a lot of debt. At the average interest rate of 14.52 percent (on a variable-rate card per Bankrate's weekly survey on credit card rates), you'd need to pay $689 every month to extinguish the entire balance in one year. You'd end up losing almost $615 in interest, almost enough to cover an entire average monthly mortgage payment (minus taxes and insurance) or eight nights out at a fancy restaurant.

If you pay only the minimum (calculated as interest plus 1 percent of the balance), it'll take more than 25 years to pay it off, and you'll give away about $8,738 in interest to your credit card company. That's more than the original debt.

(Your credit card bill should spell out this financial black hole so you can't plead ignorance. Under new federal laws, your statement is required to show how long it will take to pay off your balance with the minimum payment and how much you will ultimately pay in interest. It should also illustrate what you need to pay every month to wipe out your balance in three years.)

Of course, that $7,654 figure from CreditKarma is an average. That means there are people out there who owe more than that. I can back that up with personal knowledge. As Bankrate's Credit Card Adviser, I receive many emails from people who owe tens of thousands of dollars. Some ran into a medical emergency; others went through a divorce. A few found out they were knee-deep in credit card debt only after their spouse died, and creditors from their joint accounts knocked on the door.

For many of those, credit card settlements and bankruptcy may be their only options. But for the rest of you, here are few tips to gird against a credit card debt abyss. Keep socking money away for emergency savings and make sure your insurance meets your financial needs. Do you have enough medical coverage? Does your life insurance take care of financial obligations your loved ones may face? Stay in the know about your household finances to avoid nasty surprises after a divorce or spouse's death.

If you find that you can't pay your balance in full for more than a month, put down your credit card. Make a concerted effort to rid the debt by slimming down your budget. For the next few months, go without cable television. Cut back on shopping and going out. You'll sleep better.

Are you a revolver? Does it make you worry?

Follow me on Twitter: @JannaHerron

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