Consumer Debt

Consumer Debt

This article is reprinted from money-zine.com:The total amount of consumer debt in the United States stands at nearly $2.4 trillion in 2010. Based on the 2010 Census statistics, that works out to be nearly $7,800 in debt for every man, woman and child that lives here in the U.S.If you’re saying to yourself – that that statistic doesn’t seem quite so bad – keep this in mind:  We’re talking about consumer credit, which does not include debt secured by real estate. If you thought that number has debt associated with mortgages, it doesn’t.

Consumer Credit Breakdown

So just how does that debt breakdown in terms of credit cards or the purchase of a new automobile? Roughly 33% of all consumer debt, as of October 2010, is what is termed revolving credit. This is credit that is repeatedly available as periodic repayments are made to lenders. The most common type of revolving credit would be credit card debt.The other 67% of that debt is derived from loans that are not revolving in nature. This type of debt would include automobile loans, student loan, as well as loans on boats, trailers, or even vacations. In fact, these statistics also tell us that the average new car loan is over $27,600, and the loan to value ratio is 83%. That means new car buyers are using down payments that are 17% of the car’s purchase price.

Federal Reserve and Consumer Debt

So just how does those establishing monetary policy at the Federal Reserve feel about consumer credit? Here are some conclusions that Alan Greenspan came to back in April of 2005. “As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have.  This fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”At that point in time, he did not appear to be concerned about the growth in consumer credit. In fact, he is heralding the financial services industry for making changes that allow even those of limited means to have access to credit.In recent years, Alan Greenspan has been sharply criticized for his handling of the subprime mortgage industry. The collapse of that industry in March 2007 began a series of lender bankruptcies that many believe eventually triggered the Great Recession.

Consumer Debt in the U.S.

The Federal Reserve also reports what is called the household debt service ratio or DSR. This measure tells us the ratio of all debt payments to disposable income. Current statistics (December 2010) indicate this ratio is at 11.9%. This means that consumers spend roughly 12% of their disposable, after tax, income to pay off mortgage obligations and consumer debt such as automobile and personal loans.A broader measure of consumer debt is the financial obligations ratio or FOR. This measurement of consumer debt adds other financial obligations such as car lease payments, rental properties, property taxes and homeowner’s insurance. The FOR is arguably a better overall measure of how much disposable income goes towards paying off all “mandatory” financial obligations.As of December 2010, this financial obligations ratio stood at 15.27% for homeowners and 23.99% for renters. Nationally, including all groups, this number stands at 16.78%. What this data tells us is that the typical homeowner spends around 15% of their disposable income just to own their homes and cars. Renters outpace homeowners by over 8%, and spend nearly 24% of their income on these same types of debts.

Credit Card Debt

According to information gathered by the US Census bureau, there were approximately 173 million credit card holders in the United States in 2006, and that number was projected to grow to 181 million Americans by the end of 2010. These same Americans own approximately 1.5 billion cards, an average of nearly nine credit cards issued per credit card holder.In addition, Americans charged approximately $1,950 billion to their credit cards in 2006. That’s just over $11,300 in charges per cardholder. This information includes all credit card types such as bank cards, phone cards, as well as credit cards issued by oil companies and retail stores.This data also tells us that Americans carried approximately $886 billion in credit card debt, and that number is expected to grow to a projected $1,177 billion by the end of 2010. This works out to over $5,100 in credit card debt per cardholder (not household) and that number is expected to increase to over $6,500 by the end of 2010.You can find more information on this topic in our article on credit card debt statistics.

Bankruptcy and Consumer Debt

In January 2008, the American Bankers Association reported credit card accounts that were 30 or more days past due dipped slightly to 4.18% in the fourth quarter of 2007. That’s good news because it means more consumers are paying their bills on time.But even with this decline in late payments, credit card delinquencies were at the third highest level on record. To James Chessen, ABA’s chief economist, that can signal financial distress, and he attributes this distress to the rise in gasoline prices as well as rising interest rates.In January 2010, Fitch Ratings reported the number of cardholders 60 or more days late on payments stood at 4.50%. Cardholders that were 30 days late declined to 5.72%. Both of these values are significantly higher than reported by the ABA back in 2008.Bankruptcy FilingsDespite the Fed’s feelings about consumer credit, the bankruptcy law changes that were instituted in the fall of 2005 resulted in a rush of indebted consumers to file for bankruptcy. At that time, personal bankruptcy filings rose to their highest levels on record, with estimates in excess of 2 million filings.According to Lundquist Consulting, a research company based in California, there were 115,000 bankruptcy filings in November 2010. Year-to-date, there were 9% more bankruptcy filings by November 2010 compared to that same timeframe a year earlier. Nationally, there were roughly 6,000 bankruptcy filings per million individuals, or 1 in every 160 people.So that leaves it up to you to think about this question: Is the growth of consumer debt really a concern in America?

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