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The vicious cycle of credit card debt

The recent credit card debt crisis is proof of the fact that sometimes it takes looking beyond just the surface to truly understand a situation. So while it may appear that credit card debt is decreasing, the truth is that Florida residents and other Americans are continuing to struggle. Rather, it's just many were struggling so badly that many credit card companies had no choice but to write off some of those debts.

According to a recent study, on a national level, the average amount in credit card debt per household has dropped from $7,219 in March 2010 to $6,772 in March 2012. Additionally, for those households struggling with more debt, the average decreased during the same time period from $16,383 to $14,517.

However, while many people might automatically assume this is a testament to the economy improving, the truth is the real decrease was seen due to the fact people were so far behind on credit card payments, companies deemed what was owed "uncollectable" and wrote it off. In fact, uncollectable debt rose 300 percent since 2006.

And, looking to the future, it appears the cycle may repeat itself.

When looking at what happened earlier, the credit bubble continued to rise until it burst. Leading up to that point, poor risk assessments led to people having higher credit card limits than they really should have been approved for. This led to people living outside of their means.

After the bubble burst, companies became more cautious and not as many offers were sent out. Overall debt continued to decrease due to this and the massive amount of write offs.

However, now with lower unemployment rates and the economy starting to recover, it could end up being only a matter of time before companies start to once again take more risks and give credit cards and higher limits to those who might not be financially stable enough. This in turn can lead to the bubble once again swelling and then bursting.

Source: Forbes, "Bad News: Credit Card Debt is Down," Tim Chen, May 30, 2012

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James H. Monroe, P.A.
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