The Basics

The truth about credit card debt

Conventional wisdom is that we’re all hooked and struggling. The reality is, in fact, quite different and
less frightening.
By Liz Pulliam Weston
You’ve probably heard that the average American carries more than $8,000 in credit card debt. It’s a figure frequently cited by
politicians, journalists and pundits as a sure sign of impending economic collapse. They argue that consumers, already
struggling under this massive burden of debt, soon will have to stop spending like drunken sailors. The economic recovery,
therefore, is doomed! The surprising thing about this statistic isn’t that it’s so widely known. Rather, it’s that the statistic paints
a picture that’s just plain wrong.

• In reality, most Americans owe nothing to credit card companies.

• Most households that carry balances owe $2,000 or less.
• Only about 1 in 20 American households owes $8,000 or more on credit cards.

These figures are from the Federal Reserve’s 2001 Survey of Consumer Finances, one of the most comprehensive assessments
of what Americans own and owe.
Averages don’t tell the tale
Most of the people citing the $8,000 figure credit it to CardWeb.com, a service that tracks credit card trends. CardWeb,
however, doesn’t contend that the average American owes more than $8,000 on cards. Their statistics show that the average
debt per American household with at least one credit card was $8,940 in 2002, the last year for which figures are available. To
get that number, CardWeb simply divided the total outstanding credit card debt at the end of 2002 -- $750.9 billion -- by the 84
million American households that it says have at least one credit card. (CardWeb uses a slightly different definition of
household than the Fed does. And the company contends that 80% of households, rather than the Fed’s 76.2%, have at least one
credit card.) Now, by CardWeb’s measure and definition, the average debt in households with at least one credit card is
growing. If you know anything about statistics, however, you know that averages don’t really tell the tale. Consider what
would happen if you and 17 of your friends and family were in a room with Bill Gates and Warren Buffett. The average net
worth of a person in that room would be north of $4 billion. The fact that everybody else’s personal net worth was just
$100,000, or $1 million, or even $10 million, wouldn’t affect the average that much because the big boys are sooooo much
wealthier than you.
Take heart: We’re actually frugal
In much the same way, a relatively small population with huge credit card balances can skew the average to make it look like
the typical American is carrying a much bigger debt load than he or she actually is. Consider:

• 23.8% of American households have no credit cards at all -- no bank cards, no retail cards,
nothing.
• Another 31.2% of the households the Fed surveyed paid off their most recent credit card bills in
full.
• So together, the households that owed nothing on credit cards equaled 55% of the total.

Here’s some better news: Paying off balances actually became more common between 1998 and 2001. The proportion of
households that had bank cards (Visa, MasterCard, etc.) who reported that they regularly paid off their balances in full rose 1.5
percentage points to 55.3%.
We don’t carry that much debt
Of the households that did carry a balance, the median amount owed was $1,900. That means half of the households with a
balance owed more, and half owed less. (Medians are less subject to the skewing phenomenon that plagues averages; that’s
why economists tend to favor them.) Bill Whitt at the VIP Forum, a Washington D.C. research firm, helped me dig even
deeper. By analyzing the credit card debts of all the households the Fed surveyed, Whitt discovered:

• Only 29% of households owe $1,000 or more on their cards.

• 21% owe $2,000 or more.
• 6% owe $8,000 or more.
• 4% owe $10,500 or more.
• 1% owe $21,400 or more.

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The Fed statistics pretty much gibe with what Fair Isaac, the creator of the FICO credit score, discovered when it reviewed
millions of credit reports. There are a few differences between the universe the Fed examined and the one looked at by Fair
Isaac. For one thing, credit reports are individual -- there’s no such thing as a household or even a joint credit report. Also, you
have to have and use credit to have a credit report. Finally, credit reports don’t typically distinguish between balances you pay
off and those you carry each month. But again, Fair Isaac’s statistics show a world in which most people are light to moderate
users of credit:

• About 48% of credit card holders owed less than $1,000

• About 10% of card holders had total card balances in excess of $10,000.
• More than half of all people with credit cards use less than 30% of their total credit card limit.
• Just over 1 in 8 people use 80% or more of their credit card limit.

There’s still plenty of trouble out there

Does this mean all the hand-wringing over consumer debt is so much noise? Hardly. Although most Americans seem to be
avoiding the credit card trap, there are still plenty of people on the financial edge:

• More than a third -- 36% -- of those who owe more than $10,000 on their cards have household
incomes under $50,000, according to the VIP Forum analysis.
• 13% who owe that much have household incomes under $30,000.
• The percentage of disposable income used to pay debts is still near record highs.
• The median value of total outstanding debt owed by households rose 9.6% between 1998 and
2001.
• Bankruptcies set another record in 2003, with 1.6 million personal filings, the American
Bankruptcy Institute reports.

All of that is more than enough evidence to suggest that a large number of people are overdosing on debt. The average
American, though, seems to be doing just fine.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader
questions in the Your Money message board.