Contrarian Statistic: Credit Card Delinquencies Drop to 8-Year Low!?

From CNNMoney.com

“The number of consumers behind on their credit card payments fell to an eight-year low in the first quarter of 2010, the American Bankers Association said Wednesday. Overall, delinquencies across a wide-range of consumer debt categories have also fallen. High unemployment and plummeting home values during the financial meltdown appear to have spurred consumers to shore up their finances and banks to limit their lending, resulting in fewer Americans being late with payments, the industry group said. About 3.88% of bank credit card accounts were past due by 30 days or more in the first quarter of the year — the first time since 2002 that the rate has fallen below 4%, the ABA said Wednesday.”

As a contrarian investor I always find these kinds of figures interesting because people often do the opposite of what they should be doing (as is often the case when they make stock decisions). Common sense would dictate to many people that when the economy gets rough outstanding consumer credit would increase, as would delinquency rates, and when the economy is doing well people would use their additional wealth to pay off debt.

In reality, however, historical data shows the opposite, as this story does. When times are tough and they have less money consumers choose to repay debt faster. Conversely, they pile up debt when times are good even though that is when they actually have the money to pay cash! Very odd, but not at odds with other data that has shown that consumers and investors often do the opposite of what might be considered obvious to many (such as buying more stock after a price decline and selling shares into a significant rally).

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