The facts are in and it looks like Americans may have learned a valuable lesson: Credit, when used irresponsibly, can be a financial death sentence. The credit crisis that has gripped our country for the past few years has changed the way that we not only view but also use credit. Let's look at a few statistics:
Consumers are cutting their cards
According to TransUnion, more than 8 million people have stopped using credit cards in 2010. There are two key reasons for this. First, the subprime market isn't what it used to be. In the past, even with a limited credit history or bad credit, consumers could get a credit card. Now, after many of these borrowers defaulted on their credit card debt, credit card companies have started cutting them off and tightening their lending standards. In short, part of the reduction in credit card users was not voluntary.
The other reason for this decrease is greater responsibility amongst consumers. Some people, including many of our fellow personal finance bloggers, have sworn off credit cards after narrowly averting financial disaster. They are now using their debit cards or cash. There are also plenty of people who are hanging on to their credit cards, but paying down the debt rather than using them for further purchases.
Average debt is dropping
Apparently these changes are working. Americans are paying down their debt. This can be seen in the 13 percent reduction in the amount of credit card debt that American families are holding -- the average American family's debt dropped from $5,612 in September of 2009 to $4,964 in September of 2010.
Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit says that in 2009 credit card debt was more of a lifestyle choice but now, as the economy has weakened, many are using credit cards to pay for necessities like gasoline and grocery bills. Because of that, consumers are doing a much better job of keeping their credit card balances paid off.
In fact, only 0.83 percent of payments were past due compared to 0.92 percent during the prior year. Unlike the much higher number of mortgage delinquencies, these delinquency rates are considered normal. In fact this is one of the few credit metrics that have normalized during the credit crisis.
Thanks to the recession, Americans might actually be seeing the light. For those who have emerged from financial emergency, they are seeing the value of selectively using credit, rather than the irresponsible overuse that plagued our country prior to the financial meltdown. Credit experts advise the following:
• Don't use credit cards for anything you can't pay in full at the end of the month.
• Along the same lines, don't buy things you can't afford just to reap the credit card rewards. Every 1 percent you earn in rewards is 99 percent out of your pocket.
• Use a debit card to stay within your means.
• Keep a close eye on your credit card terms. Watch for interest rate increases.
• Don't be afraid to negotiate more favorable terms with your credit card company.
It's great that Americans are reducing debt, but it's most important that they learn responsible use of credit. Canceling your credit cards is one way to keep yourself out of trouble, but mortgage and auto lenders like people who know how to use credit correctly, rather than just avoiding it altogether. So paying down those debts is even more important.