Easing Up on the Plastic
A new government report provides both good news and bad news about America's massive consumer debt load.
The bad news: America's total consumer debt continues to rise. According to May's G.19 Consumer Credit Report from the Federal Reserve, combined (revolving and nonrevolving) outstanding debt rose by $11.7 billion in March to reach $3.875 trillion – continuing a string of monthly debt increases that goes back to January 2016. The March increase equates to a 3.6% annualized debt growth.
The good news: While overall debt is increasing, total revolving credit (primarily outstanding credit card balances) has declined for two months in a row. March revolving credit balances fell by $31.2 billion for a 3% drop, following the February drop of $6.2 billion (a 0.6% decline). In addition, the 3.6% growth rate for total consumer debt is half the growth rate of 2014, accelerating a downward trend.
Consecutive monthly dips in credit card balances and slowing consumer credit growth suggest that consumers are trying to keep discretionary spending under control – but the collective debt burden still looms as an economic threat.
A Shifting Debt Balance
Many households struggle with credit card debt, but other forms of consumer debt loom large. Ten years ago, credit card debt made up around 38% of the total household consumer debt. Credit card debt is now less than 27% of the overall consumer debt total.
Credit card debt took a huge hit thanks to the effects of the housing crisis. As credit availability tightened and many Americans cut down on spending, total revolving debt dropped from just over $1.02 trillion in the summer of 2008 to $832 billion in the spring of 2011. Revolving debt rose steadily from that point on until reaching pre-recession levels in November 2017.
Meanwhile, other forms of consumer debt have been rapidly increasing – especially student loan debt, which has risen to a staggering $1.521 trillion. Student loan debt is the second largest debt source for Americans, behind the approximately $9 trillion outstanding mortgage debt. Auto loan balances take up most of the remaining consumer debt at $1.118 trillion.
According to data from the New York Fed, student loan debt surpassed credit card balances in 2010 and the disparity has only widened since then. Auto loans surpassed credit card debt shortly thereafter.
In this context, it's understandable why credit card growth has slowed. If you are a recent graduate struggling to pay off auto loans and trying to save up for a mortgage, you can't afford extra discretionary spending. Millennials have seen the effect of overextended credit and many of them are determined not to make the same mistake. If you are interested in getting more credit, check out our top credit card offers.
Similarly, if you were affected by the housing crisis and spent years slowly rebuilding your credit, savings, and retirement funds, you are probably still cautious with your credit – especially if you also have a mortgage and/or student loan debt.
Where's the Risk?
The shifting debt balance also shifts the risk balance. According to the New York Fed's last Quarterly Report On Household Debt and Credit, credit card delinquency rates have been on a generally downward trend since 2010. The total percentage of credit card debt that was at least ninety days behind in payment dropped from over 13% in 2010 to approximately 7.5% in 2017.
Student loan delinquencies have been heading in the other direction. A sharp increase in 2012 pushed student loan delinquency rates beyond that of credit cards. Since then, student loan delinquencies/defaults have hovered between 11% and 12% of total student loan debt.
Delinquencies on auto loans are much lower, but on an upward trend to just over 4% of outstanding balances.
Rates of transition into ninety-day delinquency and beyond remain high for student loans at nearly 9% of balances – more than double that of credit cards and almost five times that of auto loans. Find out quickly at what rate you can refinance your student loan.
In short, a decrease in credit card debt doesn't counteract increases in other forms of debt. The $1.5 trillion student loan debt threatens to be a drag on the economy, sucking up funds that could be used for savings and discretionary spending. A period of slower credit growth may be necessary to bring down default rates – as long as credit isn’t throttled enough to affect economic growth.
It's doubtful that the latest consumer credit numbers constitute a change in our credit-loving ways, especially given that this data covers the post-holiday period – but the recent G.19 report suggests that we're trying to find the proper credit balance as a nation.
At the household level, credit card balances that continually rise are a serious red flag, especially if you have other significant debts such as a mortgage or student loan – and the G.19 data suggests that you're more likely to have these debts.
Are you contributing more to America's outstanding consumer debt than you were in previous months? How about two months ago? Three? If you're trending in the wrong direction, review your budget and look for areas to bring spending under control. Try to keep total monthly debts (including credit card balances) below 30% to 40% of your monthly income.
It's true that consumer spending drives over two-thirds of the U.S. economy, but you don’t have to try to drive our economy all by yourself. Keep your debt low and share the economic driving with your fellow consumers.
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