Credit-card debt: Nocera’s (convincing) take

Very smart column on credit-card debt by my one-time colleague from the Fortune days Joe Nocera in the NYT this morning. He picks up on a recent theme explored by Business Week: How the current credit crisis will affect that workaday form of debt so many of us carry around in our pockets — the credit card kind.

One theory of course is that in a kind of echo of what’s been going on in the mortgage market, consumers will soon be unable to pay their bills, on a scale that will threaten the businesses of their debtors (in this case, card issuers).

Nocera has a different, and I think more convincing, view. He knows a lot about credit cards and the role they’ve played in quotidian economic life in America since the 1960s — it’s one of the fascinating threads in his excellent book A Piece of the Action.

In the column he explains what’s been going on with credit debt in more recent decades. “Since the early 1980s, debt has gone from 80 percent to 133 percent of disposable income, according to Kathleen Keest of the Center for Responsible Lending,” he notes. At turn of the 21st Century, he continues, this trend slowed somewhat, “because the housing bubble had begun, and with it came a shift from credit card debt to home equity loans. From 2000 to 2006, Americans borrowed a staggering $1.3 trillion from their homes. By comparison, credit card debt rose much more slowly.”

By the end of 2006, however, the housing bubble had ended, and so had the ability of homeowners to use home equity loans. But it was hard to turn off the debt spigot entirely because so many people had become accustomed to living beyond their means.

Sure enough, it was right about then that credit card debt began climbing. In 2004, for instance, credit card debt grew at a rate of $6.25 billion a quarter. In just the fourth quarter of 2007, it grew by $20 billion. Total credit card debt stands today at about $950 billion. That is still not close to the $11 trillion in mortgages, but it’s within spitting distance of auto loans.

This sounds ominous. And for many individuals, it probably is ominous. But as Nocera points out, there’s a big difference when it comes to comparing mortgage companies and credit-card companies: “The credit card industry is fully aware of what is happening, and is making adjustments — if you want to call them that — to control its loan losses.” That is, it’s raising rates, imposing new fees, and so on.

Indeed, even though people who are already in trouble are likely to default, there is a whole other category of credit card users who are likely to become profitable for credit card issuers: those who usually pay off their balances every month, but because of the recession find themselves needing to go into debt. That ability to do so may be costly, and surely will breed resentment, but it will also wind up saving the credit card companies. Heads you lose, tails they win.

Hey, I didn’t say it was an uplifting column. I said it was smart.

See what you think. Here’s the link again.

[Related: More recent Business Week piece on credit card issuers starting to balk at working out deal with strapped consumers via credit counselors. “Some analysts suspect issuers are increasingly worried about losses,” BW says. One of its experts says there will be more (consumer) bankruptcies as a result.]