Equifax

Finance Blog

Credit Trends: Debt Shrinking in the Face of the Recession

Written by Janet Dedrick on July 7, 2010 in Credit  |   4 comments

Credit Trends: Debt Shrinking in the Face of the Recession By Janet Dedrick If you go only by the news over the last few years, you might get the idea that the financial world is still melting down. Foreclosures on every block, people losing their…

Debt declines in recession trendsCredit Trends: Debt Shrinking in the Face of the Recession
By Janet Dedrick

If you go only by the news over the last few years, you might get the idea that the financial world is still melting down. Foreclosures on every block, people losing their jobs and not being able to find new ones or pay their bills. And banks are the big bad guys, right?

My credit trend reports show a different picture. You might think that consumer debt is skyrocketing, but it’s actually the opposite. Outstanding debt is contracting.

If we’re seeing all these negative financial stories in the media, why is debt contracting? I’m looking at two causes:

1) Consumers who can’t pay down their debt are giving us record default rates.

2) Consumers who have some extra cash are paying down their debts.

American consumers are acting like banks right now; they’re “cleansing the balance sheets” by being more careful about the money they spend and the debt they take on.

Banks cleanse their balance sheets by becoming more cautious about the people they lend to. The pace of lending slowed as more debts were being paid down, so the debts paid off have exceeded the new loans issued.

Since October 2008, total debt balances have contracted by $690 billion, or 6 percent. I’m seeing Americans who are more cautious with their money and preparing for the future.

It might sound funny, but I’ve come to see that debt has its own life cycle. Total debt balances peaked in October 2008-remember that month? Lehman Brothers and AIG, unemployment was rising, and the credit market was seizing up-when people started to realize that they didn’t know what was going to happen in the economy in the coming months.

The credit trends show that with the increasing negative conditions at the end of 2008, U.S. consumer debt peaked and began to decline. People stopped spending, and they stopped using bank cards.

Take a look at these figures:

Total Debt Since 2008 Broken Out by Category

  • Home finance debt declined by $528 billion, or 6 percent
  • Consumer finance debt declined by $162 billion, or 7 percent

Total Consumer Finance Debt Broken Out by Category

  • Bank card (revolving) debt declined by $110 billion, or 13 percent
  • Nonrevolving debt, primarily auto and student loans, declined by $52 billion, or 4 percent (due to auto loans; see information below on student loans)

Unfortunately, from the numbers I’m seeing, I don’t think we’ve hit the bottom of the cycle just yet. We’re still waiting to see delinquencies peak, then defaults will peak, and then we’ll start to see credit grow again. When credit loosens up, outstanding debt will start to grow again-but don’t worry. That will be a good thing for the economy!

Debt greases the wheel of the U.S. economy. Households buy homes with mortgages. Consumers purchase cars with auto loans and leases. They use their credit cards to buy furniture, clothes, electronics, and vacations.

As a side note, the only area of debt where we’re seeing growth is student loans. Student loan debt has increased by $77 billion, or 17 percent, since October 2008. Some of the debt can be attributed to a lack of savings, so more people have to take out loans to pay for school. But we can also look at it as people borrowing money to make an investment in themselves. They might be having trouble finding a job, so they’re taking the time to go back to school.

The end result of this cycle of debt is that consumers are right-sizing their finances by shedding debt. Rescaling personal debt so that it is more in line with income is a good thing, but I’ll be keeping a watch on bank card originations to see when the credit market starts loosening up again.

Stay tuned to the Equifax Personal Finance blog for the latest updates on the credit market.

Read More:

How To Dispute Credit Report Errors
Four Things College Kids Need To Know About Credit
Four Myths About Your Credit History
Debt Reduction: Why Paying Down Your Credit Card Debt Helps Your Credit Score

4 comments

  1. Ilyce Glink says:

    Janet -

    You're right on top of the latest information. Today's new numbers show that consumer debt is shrinking, in part because people who can no longer afford to pay their credit card debt are falling off the rolls. Credit standards have been toughened, as David Nelms, president of Discover Card said this week, so overall the portfolio of business is stronger.

    It's hard to get credit, thought and with unemployment benefits cut off, it makes me wonder what those who have been living on their credit cards will do.

    Thanks for keeping us updated.

  2. ROJY PUTHIAMADATHIL says:

    Andrews…
    It's really sad that new commers facing problems with credit bureaus. We don't have any credit history and its prohibits to get a credit card or car loan. Everybody says like you must get your credit score.

    Is there only way to pay 1000$ and get a secured credit card. Is there no other way to get the credit history to create?? Please suggest or advise

  3. Editor, Equifax Personal Finance Blog says:

    @Rojy – thanks for reading and commenting. You should check out some of our other posts for more information on how to build a solid credit history.
    http://credit.equifax.com/2010/09/how-to-establish-credit-with-joint.html

  4. MoneyReasons says:

    Good news!

    Well, at least the following consumer debt levels is on positive to come out of "The Great Recession"…

    Now if the government would just start to be business and economy friendly again, perhaps we'll have a decrease in unemployment too…


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Credit Archive

Stay Informed Sign up for our FREE Equifax email Newsletter