Revolving consumer debt, mostly comprising credit card loans, fell $110 billion, or 12.7%, from an all-time peak in September 2008, to $866 billion in December 2009, according to seasonally adjusted data from the Federal Reserve.

So how much of the industry's stunning contraction is attributable to the pullback by lenders and belt-tightening among consumers? How much does the unprecedented pace at which uncollectible balances have been evaporating explain the decline?

Perhaps $150 billion of bad credit card debt was charged off in 2008 and 2009, based on loss rates for securitized receivables and measurements of total balances.

That's a bigger number than the net decline in revolving credit, but the story is more complex. Chargeoffs are always heavy on unsecured debt, and new borrowing has historically more than made up for the vanished balances.

One way to isolate the impact of extraordinary levels of bad debt is to hold the annual chargeoff rate at the monthly level that prevailed in January 2008, or 5.48% — which is roughly in line with the average of 5.5% from 1990 through 2007, according to an index maintained by Moody's Investors Service Inc.

Adding back receivables that were lost to chargeoffs above that pace — or about $87 million in February 2008, $2.6 billion in February 2009, $4.4 billion in August 2009 and so on — counteracts the direct impact of record loss rates. For this simulation (see chart) a steady 5.48% chargeoff rate was also applied to resurrected balances.

(Substantial payments are typically made against outstanding debt each month — about 17.1% of the previous month's balances on average in 2008 and 2009, according to the Moody's data — but healthy accounts also generate new receivables. Both these dimensions were ignored with respect to the restored balances.)

Even at a 5.48% rate, chargeoffs would have totaled about $100 billion during the period. But under the foregoing assumptions, total revolving credit would have been $915 billion in December, or a 3.6% decline from January 2008, compared with the 8.7% decline, to $866 billion, that actually happened. Thus, according to an admittedly crude rewriting of history, unusually high chargeoffs alone explain about two-thirds of the drop in revolving credit.

Of course, other forces behind the contraction are inseparable from high loss rates. Moves to tighten credit — including a 41.4% reduction in unused lines by banks from yearend 2007, to $3.3 trillion at yearend 2009, according to the Federal Deposit Insurance Corp. — were prompted by the mountains of bad loans. Likewise, cardholder defaults and more cautious borrowing are rooted in similar sets of household financial strains.

Regardless, at a rate of 11.15% in January, chargeoffs appear poised to continue to sap the industry's loan base for some time.


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