Up To Our Ears?

That’s what many seem to believe. They note that the average credit card debt per household with a credit card is over $15 thousand. Since the median household only makes $50 thousand a year, surely that’s too much.

But Mark Twain once famously noted that there are three types of lies: lies, damned lies, and statistics. Averages can be misleading. Average debt takes the total debt outstanding and divides by the number of households with a credit card. It’s pulled up dramatically by a few outliers. About half of these households pay off their credit cards every month—that means that the median household has no credit card debt. What’s more, the numbers cited count only households with credit cards; they ignore the 25% of all households that have no debt at all: no mortgage, no credit cards, no car loans.

Third, the average credit card debt figure is based on the average daily balances in bank reports. But when people use their credit cards as “plastic cash” and pay them off each month, their balance is really zero. So the bank averages are biased upwards. Finally, these aggregate numbers also include corporate credit cards, which people use for expense accounts. Although they are technically part of the consumer figures, this debt is really business debt, not consumer debt.

Consumer debt did rise during the housing bubble and has fallen since the bust. But that’s normal during economic expansions and declines. We aren’t drowning and we don’t need a life jacket.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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