How Scary is Consumer Credit?

A crucial piece of figuring out exactly where our economy stands is in interpreting the statistical data that we get from the government and other sources. It can often be easy to take a headline number and assume that the simplest interpretation is the correct interpretation -- and this is what often happens in the press. Spend a little bit more time mulling the data and you may have a different picture.

Consumer credit is something I've been mulling a lot over the past year, and for good reason -- headline after headline screams about the death of the US consumer and the pile of debt that's drowning him (and her). If you keep up with the news, it's probable that at some point you've run into the statistic that there is currently over $3,100 of revolving (read: credit card) debt outstanding for every man, woman, and child in the United States. To me at least, that sounds scary at first glance. After all, if you take a family of four, the simple math tells you that they have roughly $12,700 in outstanding credit card debt.

Now here's a speculation that I actually don't have a data-supported answer for: a not insignificant portion of that revolving debt outstanding is not what most of us would truly consider debt. I'll explain. On a monthly basis, I charge almost everything that I consume to my credit card (gotta love those airline miles). When my billing period comes up each month, I pay off the card in full and haven't paid a single red cent of interest for years (and when I did it was because I spaced out and forgot to make my payment one month).

In my own mental accounting, I would not consider that true debt -- I spend the money on my credit card as if I'm spending the cash from my bank account. In other words, I only spend what I actually have. However, if you were to take a snapshot of my credit report at a given point in time, you'd likely conclude that I have a couple thousand dollars in credit card debt.

So if we break down the Federal Reserve statistics for revolving debt outstanding, it's well worth considering how much of that "debt" is truly debt weighing on consumers, and how much of it is what you might call "convenience debt" that consumers repay from month to month.

-AvgJoe

(Now if you have the facts on this question I'd love to hear them so drop me a line either by email or in the comments...)