Lower credit card debt a sign of economic recovery

CLARKONOMICS: A new report from the Federal Reserve Bank of New York finds a dramatic decrease in mortgage debt, auto loan debt and credit card debt, all trends that I believe set the stage for a true American recovery.

By far, credit card debt is down the most, by 15% in just 2 years. Now, many pointy-headed economic types have repeatedly said they felt this reduction was due to write-offs. But the new analysis has found otherwise. The Federal Reserve Bank of New York says the biggest factor in credit card debt reduction is a change in consumer attitudes and behaviors about debt.

The interesting thing here is that the level of debt is still on the high side, historically speaking, but today’s low interest rates make the monthly carry on that debt much more manageable. At the same time, Americans have tripled the amount of their paycheck that they’re saving on a monthly basis. Yet savings rates too are still lower than historical levels.

But here’s my feeling on that: If we went into the Great Recession with far too high a level of debt, and you’re now splitting your money between saving and reducing debt, I think the debt you pay down is a form of saving.

Over the long haul, the recovery really depends on us getting our financial houses in order as individuals and families. In addition to the dollars and cents value of paying down debt, it yields other dividends too. There’s the massive psychological benefit — you sleep better at night, with no fear of going to the mailbox or answering the phone because you think a collector will be contacting you.

So if you are on the right path, congratulations. And if you’re not and you’re employed, I want you to think about a new way of handling money and really considering your wants before you take on debt.