Credit card debt has dropped to the lowest level in eight years but what’s the real reason behind the decline? According to TransUnion, the averaged debt on bank-issued credit cards fell 13 percent to $4,951, down from $5,719 last year during the same time period. Have consumers become more frugal during the recession or is the decline in credit card debt actually a result of banks writing off billion of dollars in losses?

Conventional wisdom stated that national credit card debt has declined because consumers are embracing their frugal side during the recession. However, some economists believe the real reason for the substantial drop may be the high number of charge-offs over the last several months.  The New York Times reported that lenders have written off billions of dollars worth of bad accounts that they now believe is irretrievable. The national total for credit card debt has declined from $915 million to $832.2 million in the last year, the latest Federal Reserve Board statistics showed.

“There is a lot of debate going on right now among economists” Cristian deRitis, the director of credit analytics with Moody’s, told the paper. “Is there truly deleveraging or are charge offs removing a lot of balances?”

Another argument by economists show that the foreclosure crisis may be a leading contributor to the lower credit card balances. Think about it.  For consumers that are facing foreclosure, many are deciding to forego mortgage payments and instead focus on paying the credit obligations that they can keep.  The house is lost but they have more cash to pay down and keep their credit cards as a backup.

Charge offs have been a major problem for consumers, who will often find their credit rating so badly damaged by their financial troubles that they are locked out of the credit system entirely. In fact, this may be a large contributor to the recent shift from credit cards to debit cards.

Why do you think the national credit card debt has hit an all time low? Have we become more frugal and focused on paying down debt — more conscious of our finances? Or, are economists on the right track – are the huge write-offs by banks a primary contributor? Perhaps it’s a combination of both. Share your thoughts in the comments section below.

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