A resounding theme of the Great Recession has been the U.S. consumer deleveraging his debt
. Outstanding balances
on all major loan types have declined during this economic cycle that began at the end of 2008 as consumers have right-sized their personal finances.
Lower amounts of debt are usually considered “good” for the economy, but the Catch-22 is that debt grows the economy until it reaches a tipping point. We are living through the tipping point.
The degree of downturn in the U.S. economy caught many unawares. More consumers have cards than any other loan type. Consumers with “bad” card debt relied on their cards more than ever with the ramp-up of unemployment at the end of 2008. Before the start of the recession, in late 2007, the average size of “bad” card debt was around $3,300, but during the worst part of the recession, around the middle of 2010, the average size increased to almost $4,800—a 45 percent increase, and a sign of the degree of consumer financial stress.
In contrast, consumers who held a card balance and remained current on card payments fared the economic cycle with only a modest increase in balances, up to $2,800 from $2,650 between 2007 and early 2009, about a 6 percent increase. These consumers are back to pre-recession balance levels, while nonpaying card consumers average about $4,300 today.
The swath of consumers currently experiencing credit challenges is more varied than before the recession. Credit problems include payment stress on the part of prime mortgage borrowers—not just sub-prime borrowers—and unprecedented payment stress on the part of home equity line borrowers, a population that is primarily a prime risk at origination. I’m seeing higher bankruptcy filings being influenced by record numbers of consumers with problematic home finance debt levels.
Debt is a multifaceted and personal issue. The nature of the recession has forced the U.S. consumer to reflect on and reconsider the role of debt. Simply put, do you control your debts, or do your debts control you?