Signs Point to End of Rise in Personal Debt
Weaker-than-expected holiday sales may be disappointing merchants, but some economists and credit counselors say the figures could be the latest sign that Americans are finally getting their debt loads under control.
Delinquencies on credit cards and loans are down significantly from a year ago, and more consumers say they are paying off their credit card bills. Caseloads at debt counseling agencies are flat.
Even the seemingly relentless increase in bankruptcy filings in California and across the nation has slowed in recent months.
Economists who track consumers’ financial health say the summer stock market correction and a widespread assumption that the economy must eventually slow down have kept consumers wary enough to keep their debt in check, at the same time that lower interest rates and a vibrant job market have made it easier to pay off obligations.
Although the evidence points to a stabilizing trend, Americans’ debt load isn’t shrinking. U.S. savings rates remain historically low, and debt payments have risen to a near-record proportion of take-home pay. Credit counselors are still expecting the traditional rush of new customers in January, as those on the edge confront their holiday bills. But concerns about widespread delinquencies have eased.
And if the trend continues, economists say, it could lead to an improved balance sheet for the nation as a whole. Less debt for Americans could lead to a smaller national debt and a more stable economy, as well as making it easier for the United States to support struggling economies worldwide.
“Consumers are more sensitive to their levels of debt,” said James Chessen, chief economist for the American Bankers Assn. “It seems that they are not taking on more than they can handle.”
In part, that’s because banks and other lenders are paying more attention to what borrowers can handle. Underwriting standards have tightened, and some companies that specialize in borrowers with shaky credit have gone bankrupt or reorganized, Chessen said. Credit card companies have become more selective, although the best credit risks still get plenty of offers in the mail.
Overall, debt loads still remain at or near all-time highs. The percentage of take-home pay spent on non-mortgage debt in the United States has climbed to more than 18%, the highest level since the boom in spending that followed World War II. As a rule of thumb, credit counselors urge consumers to seek help when their debt load reaches 20% of take-home pay.
The personal savings rate, meanwhile, turned negative for two months this fall--although this measure, which does not include stock market gains and other forms of wealth, is only a general guide. Personal saving as a percentage of after-tax income was a negative 0.2% in October, compared with a negative 0.1% in September, the first time savings had dropped below zero in 65 years. It turned positive in November, at 0.1%.
Before the mid-1990s, the personal savings rate typically hovered between 5% and 10%. But as a measure of actual consumer behavior, the personal savings rate, which is compiled by the Department of Commerce, has been criticized for not taking into account the growth in stock market wealth.
A rival measure, the Federal Reserve flow-of-funds rate, tracks the change in consumer assets and liabilities and shows a savings rate that at 2.3% is still positive, although lower than in previous years.
Sung Won Sohn, chief economist for Wells Fargo & Co., believes that as much as 20% of current consumer spending is driven by the increase in stock market wealth.
Many consumers are tapping the rise in their net worth to fund their spending--either literally, by selling investments, or indirectly, by counting on that wealth to make them financially secure long enough to pay off the debt, Sohn said.
More Seeing No Need to Add to Their Debt
Not everyone has shared in the stock market boom, of course. But after eight years with a strong economy and thriving job market, more Americans see no need to take on new debt--or they may be recognizing how much it costs them. Aging baby boomers entering their prime saving years may be contributing to the trend as well.
Blue-collar workers typically work more overtime or add a second job in order to continue spending, Sohn said. More homemakers have joined the work force and part-time workers are being induced to work full time--all factors that bring more money into households and fuel more spending without higher debt.
“If you go to Detroit, you’ll see the auto workers buying motorcycles and snowmobiles based on their overtime,” Sohn said. “The labor market is so tight that the labor participation rate is going up to a record level.”
Recent holiday retail sales figures, which lag behind forecasts, suggest consumers are keeping spending under control. Although post-Christmas sales have become increasingly important, the data on sales since Thanksgiving have disappointed major department stores. Sales at stores open at least a year rose less than 1% in the season’s first 24 days ended last Sunday, according to First Data Corp.’s TeleCheck, and a new round of sales were launched in recent days. Clothing sales have been particularly weak.
In addition to working more, Americans are telling pollsters that they plan to make more of an effort to save.
An American Bankers survey taken Sept. 30 found that 29% of the households surveyed intend to save more in the next year, while 18% expect to save less. In a survey three months earlier, 25% expected to save more and 25% expected to save less.
And although consumers are still saying “Charge it!” their enthusiasm for plastic appears to be moderating.
After 25% increases in 1996 and 1997, credit card debt rose just 8% this year, said Robert McKinley, president of CardWeb, a credit-tracking service.
“More people are paying off their balances,” McKinley said.
A November survey of 800 adults conducted for the American Bankers Assn. found that the number who planned to pay off their bills in full at least some months out of the year has more than doubled since this summer, from 20% to 42%. The proportion of consumers who say they always pay off their debt remained steady at about 23%.
David E. Ross, a software engineer in Hawthorne, has his entire Visa card payment taken directly from his credit union checking account each month. The automatic payment ensures that the bill gets paid on time and that Ross incurs no interest charges. He also has found the process keeps him from overspending.
“Once I started that, I started spending a lot less,” Ross said.
Others are trying to avoid financial trouble. Overuse of credit cards led Robert and Leslie Klein of Sherman Oaks to file a Chapter 13 bankruptcy in 1979 that required them to pay back their debts over five years. Now they limit themselves to two credit cards and vow never to carry a long-term balance.
“If we charge anything, we pay it off in one or two payments, maximum,” said Klein, a retired court clerk. “Every time you pay off a debt, you give yourself a pay raise.”
Some of the change in consumer borrowing is also due to borrowers taking advantage of low interest rates to refinance their homes or take out home equity loans to pay off their credit card debt, McKinley said.
The percentage of homeowners with home equity lines of credit has increased from 6% 10 years ago to 8% today, a Federal Reserve survey shows.
Using home equity to pay off consumer debt can make sense financially, because many home equity loans offer tax breaks and lower rates than the typical credit card. But borrowers put their homes at risk in doing so, increasing the chance that a layoff or other financial setback could result in a foreclosure.
So far, most borrowers are staying out of trouble. Delinquency rates on all major forms of consumer debt have eased, with seriously late payments on bank-issued credit cards at 3.28% of total card debt, down from 3.53% a year ago and well below the late 1996 peak of 3.72%.
Likewise, delinquencies on auto loans, home equity loans and home equity lines of credit are below their year-ago levels.
The National Foundation for Consumer Credit, an umbrella organization for the nonprofit Consumer Credit Counseling Services, said client caseloads have hit a plateau of 1.5 million for the past two years after several years of double-digit increases.
L.A. Credit Counseling Caseload Unchanged
The trend holds true in the Los Angeles area as well. After nearly doubling from 21,000 families in 1994, the Consumer Credit Counseling Service of Los Angeles says its load has remained static at about 40,000 new cases in 1997 and 1998.
The proportion of families in serious trouble also remains about the same. About 25% of the service’s clients sign up for a debt management program that helps them renegotiate with their lenders, while about 7% are so far in debt that credit counselors refer them to an attorney for help with filing bankruptcy, said Executive Director Gary Stroth. The remaining two-thirds of their customers come for minor tuneups, getting counseling or taking classes in budgeting, expense reduction or becoming smarter consumers.
Bankruptcy filings eased for the three months ended in September. Personal bankruptcy filings in California fell 4.5% compared to the earlier quarter, while filings nationally were down 3%.
Bankruptcy experts aren’t sure if the slowdown is just a breather in the steady upward march of bankruptcy filings or if this marks a real break in the trend. Summer months tend to be a slow time for bankruptcy petitions, and personal filings for all of 1998 are still ahead of last year’s levels by 3.9%, both nationally and in the California central district that includes Los Angeles.
A key question is how well consumers could weather an economic slowdown or change in stock market fortunes. Financial planners recommend that families build up a cash cushion equal to at least three months’ worth of expenses, or more if a job is a risk.
The American Bankers survey found that 46% of those surveyed believe they could live off their savings for six months if they lose their job.
Although Chessen said he is heartened by consumers’ confidence, he also takes their security with a grain of salt.
“Historically, we know that people say they will pay off their holiday spending in a couple of months, when we know it typically takes six months,” Chessen said. “They’re often not as realistic about what they’re spending and what they’re able to pay off.”
* POST-CHRISTMAS TIPS
Financial experts offer advice on what to do if you overspent during the holidays. A42
