The Basics: Consumer Debt Trends

Consumer Debt Trends:

Getting into the problems and solutions of consumer debt, it is important to note a troubling trend. In the past several years, there has been a significant increase in the amount of debt incurred by consumers. The key drivers for this increase include:

- Mortgage lenders provided an overabundance of available credit as a direct result of the housing boom. Many mortgage lenders softened credit standards, ignored underwriting requirements, and issued home loans well in excess of healthy guidelines.

- Low mortgage interest rates.

- Surge in Internet shopping.

- Credit card companies have issued new credit or increased availability with credit cards. Many people (and businesses) have relied on this abundance of available credit to finance increasingly expensive lifestyles (or increasing business costs). As the credit markets tightened, this available credit has been significantly reduced and even eliminated for many borrowers.

Although many of these trends have recently reversed, the result of such practices should be no surprise with the recent and unprecedented number of foreclosures and bankruptcy filings.

Facts and Figures:

According to the U.S. Bureau of Economic Analysis, in 1980 U.S. consumer spending was 63% of the total Gross Domestic Product (The simple definition of GDP is the total market value of all goods and services produced within a country in a given period of time). This consumer spending recently increased to almost 71% of GDP. During the same time period the personal savings rate declined from 10% to nearly 0.5%.

Total U.S. consumer debt made up of home mortgages, auto loans, credit card debt, personal loans, and other personal debt is estimated to be $13.8 trillion.

Experian estimates:

The average individual U.S consumer debt (not including mortgage debt) to be $16,635.
One in six consumers with credit card debt only pays the minimum amount due each month.
MSN Money recently cited that approximately 43% of Americans spend more than they earn each year.

According to http://www.myfico.com/ average credit statistics are as follows:

Number of Credit Obligations - On average, today's consumer has a total of 13 credit obligations on record at a credit bureau. These include credit cards (such as department store charge cards, gas cards, or bank cards) and installment loans (auto loans, mortgage loans, student loans, etc.). Not included are savings and checking accounts (typically not reported to a credit bureau). Of these 13 credit obligations, 9 are likely to be credit cards and 4 are likely to be installment loans.

Past Payment Performance - On average, today's consumers are paying their bills on time. Less than half of all consumers have ever been reported as 30 or more days late on a payment. Only 3 out of 10 have ever been 60 or more days overdue on any credit obligation. 77% of all consumers have never had a loan or account that was 90+ days overdue, and less than 20% have ever had a loan or account closed by the lender due to default.

Credit Utilization - About 40% of credit card holders carry a balance of less than $1,000. About 15% are far less conservative in their use of credit cards and have total card balances in excess of $10,000. When we look at the total of all credit obligations combined (except mortgage loans), 48% of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit, and loans-everything but mortgages. Nearly 37% carry more than $10,000 of non-mortgage-related debt as reported to the credit bureaus.

Total Available Credit - The typical consumer has access to approximately $19,000 on all credit cards combined. More than half of all people with credit cards are using less than 30% of their total credit card limit. Just over 1 in 7 are using 80% or more of their credit card limit.

Length of Credit History - The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time. In fact, we found that 1 out of 4 consumers had credit histories of 20 years or longer. Only 1 in 20 consumers had credit histories shorter than 2 years.

Credit Inquiries - When someone applies for a loan or a new credit card account - in short, any time one applies for credit and a lender requests a copy of the credit report - this request is noted as an “inquiry” in the applicant's credit file. The average consumer has had only one inquiry on his or her accounts within the past year. Fewer than 6% had four or more inquiries resulting from a search for new credit.

Easy Credit:

Until around the middle of 2008, many credit card companies were aggressive and some were even considered predatory lenders (predatory lending is the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms or terms with a high likelyhood of not being satisfied). These practices allowed almost everyone access to credit card debt. They promised instant gratification and improved lifestyles. These promises certainly are supported by the statistics cited above with spending at a 20 year high and savings at a 20 year low.

While many people used credit card debt properly many did not resulting in “extreme” overspending. Those that did not found themselves using credit cards and other revolving credit to finance everyday expenses such as groceries, gas and other household expenses on top of unaffordable lifestyle expenses such as vacations, cars, furniture, appliances, and home remodels. Many people who abused this easy credit did not take into account the consequences of such overspending.