Recently I was puzzled by a debt service chart included in a presentation by Abby Joseph Cohen. The data for her graph comes from the Household Debt Service report produced by the Federal Reserve. My problem is reconciling the data with my belief that the average family is under a greater debt burden than is represented by the data. Although credit card debt is a small portion of the consumer debt, it is the most attractive debt to pay off as soon as possible.

Credit card debt is described by the Federal Reserve as revolving debt. The latest number from the Federal Reserve Consumer Credit report is 815.4 billion dollars. The Census Bureau’s Quickfacts says the number of households in the US is 114.2 million. When we divide these two numbers together, we get the average credit card debt per household is $7,140.

If we take the average credit card debt and plug it into Bankrate.com’s minimum payment calculator we get a minimum payment of $178.50 or $2,140 per year. For those who are curious this plan results in $10,133.07 in interest payments and 308 months(25 years) to pay off the balance. If we divide the annual minimum payment amount by the BEA nominal disposable personal income per capita, $37,976, we get 5.6% debt burden. This debt burden is a little higher than the 4.95% debt service burden reported by the Federal Reserve. Hmm… if debt service payments is a good indicator of financial pain for the “average” household then I would have to agree with Abby that with debt service at 1990’s levels, the households are not suffering from making their payments. Here is where I have a problem with Ms. Cohen’s analysis. My numbers imply that the consumer is making minimum payments on high interest loans. This is typically the sign of either a financially “dumb” consumer or a consumer who is maxed out. Neither situation will lead to sustainable consumer spending. With low inflation and wage growth the smart consumer should pay down credit card debt.