With unemployment high and personal wealth diminished, how was it that strapped consumers were paying down their credit card debt last year? It turns out they probably weren't.
The bulk of 2009's drop in credit card debt instead came because banks were forced to write off loans consumers failed to pay, according to an analysis of Federal Reserve data.
Loans are typically charged off by banks once they're 180 days past due, under the assumption that the debt won't be repaid.
In 2009, banks wrote off a record $83.27 billion in credit card debt. A study by consumer credit research site CardHub found that accounts for the bulk of the of $93.2 billion drop in consumer card balances reported by the Fed for last year.
"If you just look at the numbers, you think, 'Oh my goodness, there was a big decrease in credit card debt,'" said Odysseas Papadimitriou, the CEO and founder of CardHub.
But Papadimitriou said it didn't add up that consumers could make such a big dent in debt while under the financial pressure Americans faced last year.
When you consider how much banks are being forced to forsake in bad loans, however, consumers' ability to pay off balances doesn't appear as rosy.
The only time consumers truly paid down their debt was in the first quarter of last year, the CardHub study finds. During those three months, card balances fell by $46.9 billion, excluding the $17.59 billion banks wrote off.
After that, card balances either remained steady or rose.
The charge-off rate on credit card loans spiked dramatically in the downturn, hitting a record 10.1% in the third quarter of 2009.
The rate eased to 9.4% for the year's final three months. By comparison, the rate was 4% in the fourth quarter of 2006, a year before the downturn began.
The situation may only get worse for banks. Moody's Investors Service expects the charge-off rate to top out at 12% later this year. Charge-off rates vary depending on the bank, however.
- Quick quiz: Get a free credit score estimate
At Bank of America, the annual net charge-off rate for U.S. cards declined to 13.2% in January from 13.5% in December, while Capital One said its rate rose to 10.41% in January from 10.14% in December.
Gail Cunningham, of the National Foundation for Credit Counseling, said she's not surprised if consumers are still leaning on credit cards, especially given the high unemployment rate.
Still, she said she's noticing significant belt-tightening.
"People have made a conscious decision to rein in their spending," Cunningham said.
More from MSN Money
- 5 steps to dig yourself out in 2010
- Debt counselors' crazy client tales
- Your 5-minute guide to budgeting
- Make your debt vanish? Don't bet on it
- Foreclosure or bankruptcy: What to do?