“Disciplined Consumers” Paying Off Debt
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Americans across the country are paying off debt and remaining cautious about taking on new debt. Is this due to a greater economic recovery, or are consumers playing a larger part in debt levels? And how might this affect credit scores?
Overall consumer debt fell by 2.28 percent in the third quarter of the year versus the same period a year ago, marking a $256 billion drop over the last year. U.S. consumers owe a little less than $11 trillion in total debt, with mortgage debt accounting for slightly more than three-quarters of that amount.
The drop in debt reflects a rise in what Trey Loughran, president of the Personal Solutions unit at Equifax, calls the “disciplined consumer”—a borrower who is more disciplined in taking on new debt and is careful about how he or she manages pre-existing credit.
“Generally speaking, consumers are showing discipline and caution about debt coming out of the recession,” Loughran said. “Even though people are taking on debt to get new automobiles, we also know they are driving their cars longer. We expect the trend of the ‘disciplined consumer’ to continue for some time.”
Of the overall debt, non-mortgage consumer debt increased 0.7 percent, due largely to continual increases in auto financing. Auto debt rose 7.1 percent nationally over last year and is one of the few areas where spending has recently increased.
On the other hand, mortgage debt dropped 3.4 percent. While the decrease in mortgage debt may be due to Americans consistently paying off their mortgages, mortgage debt also gets written off after foreclosures, dropping total consumer debt.
Differences in consumer debt seen across the United States
While debt decreased overall nationwide, consumer debt increased in three cities over last year. In the Houston area, debt climbed 1.37 percent; in Pittsburgh, it increased 1.05 percent; and in the Dallas-Fort Worth area, debt grew 0.08 percent.
The recession has affected portions of the country differently, with unemployment figures varying city by city and foreclosure rates changing dramatically state to state. Residents of states hit particularly hard by the recession—California, Florida, Nevada, and Arizona—have been more cautious about taking on new debt and have been more regularly paying off their debt.
The largest declines in consumer debt were in the Las Vegas, Miami-Fort Lauderdale, Sacramento-Yolo, and Phoenix-Mesa markets—all areas that had some of the highest foreclosure rates amid the recession.
After the holidays, it’s possible that the last quarter of the year will see higher consumer debt than previous quarters—typically consumers rack up some temporary debt during the last part of the year. Whether the overall trend will continue to decrease year over year remains to be seen.
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