Question

As of January 2011, nonmortgage consumer debt had increased for the fourth straight month. At the same time, credit card debt fell to a six-year low point. Excluding mortgages, how can it be that consumer debt is rising while credit card debt is falling?

A) People are borrowing from sources other than credit cards.
B) Credit card companies are increasing interest rates.
C) People are paying off credit card debt with other loans.
D) Credit card companies are offering lower credit limits.

Answer 1

Consumer debt can rise while credit card debt falls because people might be borrowing from other sources or using alternative loans with lower interest rates to pay off higher-interest credit card debt.

Step-by-step explanation:

As of January 2011, while nonmortgage consumer debt had increased for the fourth straight month, credit card debt fell to a six-year low. This seemingly contradictory situation can occur if consumers are engaging in different financial behaviors. One plausible explanation is that people are borrowing from sources other than credit cards (Option A), such as personal loans, student loans, or car loans, which might offer lower interest rates or are more suitable for their borrowing needs. Another cause might be people using these alternative loans to pay off higher-interest credit card debt (Option C). Increases in interest rates and lowering of credit limits by credit card companies could also contribute to lower credit card debt, as it might discourage new borrowing and prompt consumers to pay down existing balances more aggressively.