Are Consumers Drowning in Debt?
Growing consumer debt raises concern:
Are you in too deep?
Findings:
June 2006
- Consumer debt increased 12.5% between February 2004 and February 2006
- The number of late payments increased almost 20% in that same time period
- Personal bankruptcies increased over 31% between 2004 and 2005
- In 2006, the average U.S. savings rate dropped into negative territory at –0.5%
 With interest rates rising, a negative US savings rate and a spike in personal bankruptcies and foreclosures, Americans may be feeling the ill-effects of increased debt and consumption. According to a separate Experian-Gallup Personal Credit Index study, consumers might have taken a “let’s live for today” approach. Among all Americans, 17% expect their overall debt load to increase within the next six months. And 35% of Americans believes that given the direction that interest rates are heading, now may be a “somewhat” or “very” bad time to take on new debt.
Are American consumers living in a hedonist world?
Have they started using credit as a means to achieve the American dream? That’s what the Experian National Score Index hoped to find out with this month’s study, which compares average consumer debt between February 2004 and February 2006 in five categories.
The study showed that over the last 24 months, consumers racked up a substantial amount of personal debt, and with it, higher numbers of personal bankruptcies and foreclosures. Although we see a decrease in consumers obtaining new credit, many experts on personal debt and the economy predict that consumers will continue to spend.
| |
Feb 2004 |
Feb 2005 |
Feb 2006 |
% Change
2004 to 2006 |
| Debt*,** |
$10,371 |
$11,261 |
$11,669 |
12.5% |
| Monthly payments* |
$489 |
$506 |
$538 |
10.0% |
| Number of late payments |
0.78 |
0.88 |
0.93 |
19.2% |
| Number of credit inquiries |
2.59 |
2.43 |
2.33 |
-10.0% |
| Number of open credit cards |
3.17 |
3.12 |
3.11 |
-1.9% |
* Does not include mortgage loan balance or monthly mortgage payment
** Debt consists of both revolving and installment credit
Consumer debt and late payments on the rise - again
A comparison of consumer debt reveals several interesting differences between 2004 and 2006. The first thing that jumps out is that revolving and installment debt increased almost 13%. Revolving debt typically includes credit card accounts and department store charge cards, while installment debt includes auto loans, student loans and other loans with a fixed monthly payment.
The other startling statistic revealed by the Experian National Score Index was that average late payments increased almost 20%. Combined with the double-digit increase in consumer debt, this may spell double-trouble for many Americans. Late payments, including collections, can have a major impact to a credit score; even one late payment can cause a credit score to drop significantly.
More foreclosures and bankruptcies, less savings
Increased debt and late payments are not the only trends that consumers should be aware of. It's important to note home foreclosures in America are trending up. According to RealtyTrac, in 2005, there were 846,982 foreclosures. Additionally, there have already been more than 220,799 through February 28th, 2006. Combined with interest rates rising, home appreciation falling, and the fact that many homeowners have adjustable rate, interest-only loans, many economists and industry observers expect the pace of foreclosures will continue.
Another telling statistic is personal bankruptcies. As debtors rushed to file petitions before new restrictions took effect, according to the Administrative Office of the U.S. Courts, bankruptcies filed in 2005 totaled close to 2.1 million in 2005, up from 1.6 million petitions filed in 2004. That was the largest number of bankruptcy petitions ever filed in any 12-month period in the history of the federal courts.
Further, the average U.S. savings rate has been dropping steadily since 2004. In 2005, it flat lined (0.0%), and in 2006 (to date), it's negative (-.5%). That is, the average consumer is now spending more than they earn.
There's light at the end of the debt-ridden tunnel
It's important to note two positive signs in the data: The average number of credit inquiries is down and the average number of credit cards is down, which is encouraging. The former reveals that consumers are not applying for as much credit as in the past. Perhaps they see the writing on the wall. The latter seems to show that consumers may be avoiding the old trick of “borrowing from Peter to pay Paul.” That is, the pace of applying for new credit cards and “rolling over” old credit card debt seems to have slowed.
So what does this mean?
For consumers, it is important to understand how increases in debt can impact a credit score. While carrying debt is not necessarily negative on its own, having balances which are close to credit limits can potentially lower a credit score. In addition, high debt levels combined with late payments can be a red flag for some lenders. By understanding how credit scores consider these elements, consumers can empower themselves to make more educated decisions when it comes to managing their debt and their credit.
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