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Have Consumers Really Learned a Lesson About Debt?

A recent publication out from the Federal Reserve appears to indicate consumers have learned to cut back on debt, at least for now.

The reduction might be to a number of events and not just the sudden realization that too much debt is problematic. For example, people may be feeling less confident about the future and that’s driving their spending. Or maybe easy credit is just less available and the banks have turned down the spigots of credit.

No matter what the reason, the result is household debt is down by $1.3 trillion since the start of the recent financial crisis. And the data suggests the decline was accelerating in the third quarter of 2012.

For consumers this might be great news. For debt relief companies that offer help with problem debt, this is bad news. Less debt creates less demand for their services.

Have Consumers Really Learned a Lesson About Debt?

Consumers that are still carrying debt are doing a better job of staying current with their payments and are rebounding to pre-crisis levels.

Overall delinquencies by credit type also show a decline.

Have Consumers Really Learned a Lesson About Debt?

And consumer bankruptcies rose with foreclosures.

Have Consumers Really Learned a Lesson About Debt?

The Federal Reserve addressed the issue of the reduction in consumer debt. The drivers of this seem to be frequently in dispute. Debt relief companies say the numbers are down because creditors have charged off debts but others say it is because consumers have learned a lesson about managing debt.

The Federal Reserve said, “But in looking at the recent date it appears the reduction in consumer nonmortgage debt is actually not from continued charge-off from bad debts but from a lower consumer reliance on nonmortgage debt.

Credit by type has also remained flat as well. If we just look at the number of accounts by type you can see the number of credit card took a big hit in 2008, at the same time as the most recent bankruptcy peak and has remain flat since.

The data about new installment accounts shows a little growth, but certainly nothing to lead us to believe there is a rebound in credit in the near future.

“Quarterly account openings had fallen nearly 40 percent, from a peak of roughly 250 million in each quarter from third-quarter 2005 to third-quarter 2007, to 158 million in third-quarter 2010. Since then, the number of account openings has increased modestly, to 177 million, but remains well below its peak sustained levels,” said the Federal Reserve.

Additional data suggests that the drop in new accounts isn’t just creditors turning people away but a decreased interest in consumers to apply for new credit. Follow the green line in the chart below.

Have Consumers Really Learned a Lesson About Debt?

The credit report inquiries series in Chart 8 (green line) tracks the new account series quite closely. As the twelve-month rate of new account openings falls by more than a third from its 2005-07 plateau of around 250 million to a low of 158 million in third-quarter 2010, the rate of inquiries quite similarly drops from a plateau of around 240 million inquiries per six-month period from 2005-07 to a second-quarter 2010 low of 150 million inquiries, before bouncing back slightly and stabilizing at around 165 million inquiries—very near the twelve-month account openings level during the last two years of data. The available evidence suggests that fewer applications for credit from borrowers contributed to the decline in new account openings.

Credit card balances have declined faster since 2010 than credit card limits decreased, suggesting consumers are paying down debt by want rather than demand.

Have Consumers Really Learned a Lesson About Debt?
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://www.avoidbk.com/ Jared Strauss

    Great article. The rise in student loan debt is alarming. And it appears to be unprecedented for any debt class based on that first chart. This is very scary considering the collection vehicles that are afforded to student loans.

    Something else I found to be interesting is the recent phenomenon of student loan debt held by people 60 years and older. This segment increased their borrowing by over 500% from 2005 – 2012 (from 8 billion to 43 billion). That’s insane.

    • http://GetOutOfDebt.org Steve Rhode

      I’ve be rattling on about student loan debt and the dangers since the late 1990s. The biggest change I’ve seen is the altering perception that maybe all student loan debt is “good debt.”

      Back in the 1990s the mantra was that student loan debt was the best type of debt to take on and that perception stuck.

      The saddest cases of older student loan debt are those that co-signed for their kids or grandkids and got stuck with the debt.

      Student loan debt is going to become the biggest factor for the downward pressure on the debt relief industry. More student loan debt leaves less room for other credit/debt.

      • http://www.avoidbk.com/ Jared Strauss

        I agree. Especially when you consider the amount. As you pointed out, the perception has been that less credit has been issued since the meltdown, but in reality its basically doubled. It’s just being consumed via a different vehicle (student loans instead of credit cards).

        Not only is it bad for demand for debt relief, but the future economy as a whole. We’re talking about a ton of future purchasing power that has been compromised here. And when you couple that with lower wages and higher costs for necessities, I’d have to say that our outlook is looking quite bleak.

        I’m curious, what is your opinion on why the 60 and over crowd has expanded their borrowing so much? Based on the overall increase in lending, it suggests that qualifying for student loans without a cosigner would be fairly easy.

      • http://GetOutOfDebt.org Steve Rhode

        This previous post was very telling and shows the surge in co-signing starting in 2008. http://getoutofdebt.org/44615/suicide-over-student-loans-tragic-but-understandable

        Also look at the chart that shows how FICO scores were not a factor in student loan lending till 2009. Until then “all aboard.”

        The growing problem of student loans is a great example of the benefit and power of bankruptcy.

        Without the ability to clear away unmanageable debt we simply slow our overall economic engine.

      • http://www.avoidbk.com/ Jared Strauss

        Very interesting. So they saw the bubble coming and figured it best to wipe out 2 generations. Nice. What a lovely system we have in place.

      • http://GetOutOfDebt.org Steve Rhode

        You got it.

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