Is Less Available Credit Good or Bad? The Total Consumer Credit Statistics Explained
Consumer Debt In America

What does the credit crunch mean?

The most recent consumer credit statistics issued by the Federal Reserve show that nationwide total consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. In addition, revolving credit decreased at an annual rate of 13 percent and non-revolving credit decreased by roughly 1.5%. Basically, this means there’s less credit available for people to use right now but when you look at the numbers, you might be tempted to think that’s not necessarily a bad thing.

As of April 2010, the total consumer debt in America stands at roughly $2.5 trillion dollars. That’s approximately $8, 100 in debt for every person (including children) that lives in the United States. A 2007 study conducted by the National Association of Business Economics showed the combined threat of subprime loan defaults and excessive indebtedness posed the biggest short-term threat to the U.S. economy and we certainly saw the fallout from that in the 2008/2009 financial crisis.

So if the total consumer credit numbers declining, and there’s a little less easy credit floating around, you’d think most debters would use this time to reign in spending and focus on paying down their debt. Here’s why that’s not quite so easy.

The Top Reasons Why Total Consumer Debt in America Won’t Decrease Anytime Soon:

  • Unemployment. The current rate is a staggering 10.2. Many Americans don’t have the means to pay for daily expenses such as food. Credit becomes the means.
  • The Credit Crisis Aftermath: Banks and creditors have become nervous to lend money to us. This means overcompensating with higher rates of interest to cover their risk.
  • The Household Debt Service Ratio: Current consumer credit statistics (Nov 2009) put the ratio of debt payments to disposable income (called the household debt service ratio) at 13.1%. In layman’s terms, consumers already spend roughly 13% of their monthly, after-tax income to pay off debt obligations such as loans, auto payments, and credit card bills.
  • Medical expenses. 29% of low and middle income households reported that medical expenses sucked them into credit card debt.
  • The belief that debt is unavoidable and necessary. 72% of Americans believe that consumer debt is a part of modern life and difficult to avoid, while 66% believe it is a result of unfortunate circumstances beyond a person’s control.

In the real world, less total consumer credit available just means expensive mortgages, more reliance on credit cards, wildly fluctuating stock markets, and twitchy banks quick to pull the trigger on repossession and bankruptcy.  It means confidence is shaken in the ability of consumers to pay back their debts (at $2.5 trillion, it’s a little understandable.) It means more defaults and more people searching for alternatives to bankruptcy. And it means a harder road for the next generation coming of Americans who will want houses, educations, and cars but are starting out (theoretically) already $8K in the hole.

It’s a little daunting.

The Joshua Just Blog is written by Joshua Just, CEO and Founder of Diversified Investments. An experienced leader in the market place, Joshua Just has founded several successful firms in the areas of real estate, aviation, litigation & financial management.

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