Credit-Card Debt: The Next Possible Implosion

As consumers face a cornucopia of bad financial news -- plunging home values, higher food and gas prices, a shrinking job market and the like -- there is one place they may be turning to fill in the gaps: credit cards.

U.S. consumers are already burdened with a mountain of debt: $2.54 trillion at the end of February, according to the Federal Reserve. Revolving debt, which typically comes from credit cards, has increased at a faster rate than overall debt since the summer of 2006 -- right about when the housing market began to implode.

The trend seems to suggest consumers are using credit cards to patch up holes in revenue that once could be filled by refinancing or selling a home. Now that home values have dropped sharply and are predicted to fall further, at least over the short term, consumers are left without the housing crutch they once relied upon.

The other available crutch -- credit cards -- may simply inflict more pain, as balances accrue, interest rates rise and fees are attached. This is especially true for those with weak FICO scores, who are already in a bad debt situation and face higher interest rates because of the risk involved in lending to them.

"To go to worse in debt from badly in debt right now could be something that is largely irreversible," says Michael Branham, a financial planner at Edina, Minn.-based Cornerstone Wealth Advisors. "It doesn't make any sense, and yet people are doing it. They continue to spiral into more and more debt."