U.S. consumer debt load remains high

As the economy continues to tip toe toward a healthier state, consumer confidence has risen substantially from a year ago but remains wobbly on a month-to-month basis. This caution heeded in consumer confidence has direct correlations to a rise in debt load and unpredictability in the job market.

A recent National Foundation for Credit Counseling (NFCC) online poll revealed that close to one in five consumers, 18%, believe that carrying credit card debt over from month-to-month is a responsible way to manage finances.

“This data suggests that not only are many Americans using credit cards to fund a lifestyle their income can’t support, but they are comfortable doing so,” said Gail Cunningham, spokeswoman for the NFCC.  

She urges consumers to be aware of the following consequences associated with continually carrying credit card debt from month to month:
• Interest on a credit card is typically calculated on an average daily balance. For those who carry a balance over from the previous cycle, interest is not only charged on the unpaid balance, but on any new purchases added to the balance. With interested added onto the balance month after month, consumers end up paying interest on the interest.


• Carrying a balance has the potential to negatively impact a person’s debt to credit ratio, one of the main components of credit scores.


• A higher balance decreases the amount of credit available for future purchases.

The average U.S. household credit card debt stands at $7,149, the result of a small number of deeply indebted households forcing up the numbers, said William Bailey, professor of family finance at the University of Arkansas. He said when a consumer’s revolving debt is 16% or more of their net income, they are considered an indebted household. Looking only at indebted households, the average credit card debt owed is $15,325 per household.

U.S. credit card debt reached $856 billion in July, and government statistics indicated roughly 47% of American households owe balances on at least one credit card.

Bailey said a growing number of consumers are living on the edge and financing their life styles with credit cards, which is a slippery slope. He said after the recession in 2009 consumers began paying down their debt, but as the recovery gradually extended year after year, consumer attitudes now reflect more ease with carrying debt.

A separate study by TransUnion indicates that consumers who carry revolving balances are more likely to fall 90-days delinquent. Revolvers, those who carry balances and pay the minimum owed, are three times more riskier on new cards and carry five times more risk than those consumers who pay off their full balances each month. The study ran from March 2011 through 2012 and found that 44% of the new cards issued in this period were to “revolvers,” while 38% of the new bankcard accounts were for “transactors,” those who repay the full balance each month.

Another 18% of consumers were in an inactive status with their cards.

TransUnion also found “revolvers” were three times riskier than “transactors” when opening an auto loan.

Credit counselors said while carrying a debt load has its perils, there may also be disadvantages related to charging too little. In the NFCC poll, 21% of the respondents indicated they didn’t use credit cards at all. Bailey wasn’t surprised to see those results citing older citizens and the unbanked as the primary consumers who don’t use charge cards.

The NFCC report noted that cash and debit card transactions are not typically reported to credit agencies, which can make it difficult for a consumer to build up their credit rating, which is needed in most cases to purchase a car or home.
         
They also say credit cards provide less risk of loss exposure if stolen. Cash is just gone, but most credit card companies have consumer protection features that protect against losses if the card is lost or stolen.

In the NFCC poll, 61% of respondents believed that paying credit card debt in full each month is the only responsible way to manage personal finances. Bailey said those respondents aren’t likely the average consumer, because credit card balances are rising on a per-capita basis.