Have Americans learned anything about debt?
By Paul Wilson
As President Obama and House Republicans negotiate in an effort to avoid the fiscal cliff, the nation continues to focus heavily on the national debt, and with good reason. After all, it affects us, our children and most likely, the generations to come. And to make matters worse, it's beginning to take a toll on important social programs like Social Security and Medicare.
But is it just me or are we being a bit hypocritical as we roll our eyes and sagely shake our heads about the nation's debt burden? After all, there are plenty of statistics highlighting just how deep a hole American households have dug for themselves.
During the height of the Great Recession, there were countless stories about how Americans were actively working on reducing debt and increasing savings. And while we may have made up a bit of ground, one can't help but wonder if we'll return to our old, improvident ways as the economy improves. Apparently, it all depends on who you ask.
Americans were freer with their credit cards during the third quarter and less regimented about paying them off, according to a recent AP story. The average debt per borrower increased 4.9 percent compared to the previous year to $4,996, according to credit card reporting agency TransUnion. And after reaching historically low levels in recent years, the rate of credit card payments at least 90 days overdue rose to 0.75 percent. Does this mean that Americans are slipping back into old habits and undoing the progress they've made in recent years? Not necessarily, according to Ezra Becker, VP at TransUnion's financial services business unit.
“We definitely see consumers being more conservative in their spending and making every effort to pay down the balances and maintain the health of those card relationships,” he said. Similarly, NPR recently posted a series of graphs illustrating just how much debt U.S. households are currently facing — $11.4 trillion to be exact. Not surprisingly, mortgage and home-equity debt still account for the vast majority. Any way you look at it, this is a huge number.
But while the debt-to-income ratio has settled back to the same place it was 10 years ago — hardly something to be proud of — the low interest rate environment has helped lower the percentage of household income that goes toward paying off debt, NPR said, which "suggests that, in a real, day-to-day way, monthly debt payments are less burdensome for families, on average, than they used to be."
If you're looking for another silver lining, a recent New York Times article pointed out that increased household debt could be a good thing when it comes to the big picture. "In the run-up to the recession, American households took on trillions of dollars of debt that they could not easily afford … Still saddled with heavy debt burdens during the weak recovery, millions of American households cut back spending on food, cars and other goods. On top of that, relatively few families have been willing or able to take out loans or lines of credit. Thus, the proportion of household debt to personal income has fallen to its lowest level since the mid-2000s from its recessionary-era peak."
But now the combination of a stabilized economy and low interest rates is inspiring many Americans to make more big purchases like cars and homes, which could create a more resilient economy, according to the article.
So, have Americans learned anything from the last few years? “The Great Depression scarred an entire generation," said Susan Lund, the director of research at the McKinsey Global Institute, in the New York Times piece. “We don’t yet know whether consumer behavior has been fundamentally changed by this crisis or not."
I'd like to think that we've been scared straight by the past few years, but to be honest, I've seen too many Black Friday stampedes, obsessive gadget junkies and unrepentant spend thrifts to put any money on it.