Low Fort Smith metro ‘smart borrowing’ score does not tell the complete story

A recent study released by the website Nerd Wallet lists Fort Smith as one of the cities in America "that are borrowing the least smart," but according to a Walton College of Business expert, the study may not mean doom and gloom for the Fort Smith area economy.

The study, which ranked the 10 areas that are "borrowing smart" as well as the 10 that are not, analyzed borrowing in comparison to income.

"We divided each metro area’s average amount of consumer debt into its median household income to get a better sense of the places that are carrying truly heavy loads. A high ratio of average debt to median household income indicates danger on the horizon," Nerd Wallet analyst Lindsay Konsko wrote.

The website made clear that the percentages created were not to be understood as the area's debt-to-income ratio. It also made clear that debt levels included credit cards, auto loans and personal loans, but not mortgages.

The study showed that Fort Smith ranked as seventh worst in American metro areas not borrowing smart, with the debt as a percentage of household income at an average of 72.9%, the second highest in the nation trailing Monroe, La., at 73.3%.

HOUSING COST FACTOR
Kathy Deck, director of the Center for Business & Economic Research at the Walton College of Business at the University of Arkansas in Fayetteville, said the study does not mean the local economy will suffer due to the higher levels of debt to household budget.

"The first thing, and they say this explicitly, is it excludes mortgage debt. It may also exclude student loan debt," she said. "When you think of the overall debt load, it might not be surprising in a place like Fort smith with relatively low incomes that folks also have relatively low mortgage debt because houses are affordable."

Deck said with low mortgage debt, it was reasonable to assume that some households could afford to take on higher levels of other debts.

"So the distribution to more household consumer debt is not necessarily surprising in an affordable housing market like Fort Smith," she added.

She said other comparable communities on the list of "least smart" borrowers included southern cities with low cost of living such as Monroe, La., Jackson, Miss., and Waco, Texas.

"If you look at a lot of the other communities, and I don't know what their housing prices are off the top of my head, but you imagine it would be comparable."

MORTGAGE DEBT COMPARISON
And while Nerd Wallet has ranked Fort Smith as among the regions with the "least smart" borrowing practices, total household debt outside of mortgage debt is not that different from cities ranked as some of the smartest in terms of borrowing.

The average debt of the 10 cities making up the smartest borrowing cities is $25,480 while the average for the 10 metros who were not the smartest about their borrowing was $26,520. The difference amounts to only $1,040. In Fort Smith, the figure is even lower with average consumer debt of only $26,296.

The figure ranks nearly even in terms of overall debt with the San Francisco metro, with its average consumer debt of $25,828 in spite of being ranked the third smartest about its borrowing. The big difference initially appears to be household incomes (San Francisco's average household income is $74,922 versus Fort Smith's $36,061).

But Deck said if mortgages were factored in, Fort Smith could be ranked closer to many of the cities labeled as the smartest borrowers.

"The others with the low (overall) debt are in the (most expensive) housing markets in the country. All of those have relatively high housing costs," she explained.

So even though the ranking may on its surface look rough for Fort Smith, she said overall it would not hurt job growth and consumer spending in the Fort Smith region.

"In a typical household, you have the budget to service that debt and this doesn't mean it is necessarily detrimental to the economy."

Deck added that used wisely, debt in and of itself is not a bad thing and actually helps to grow the economy versus shrinking it.

"When you look at the overall economy and retail sales across the board, there are only two ways to increase consumer spending — more income or more borrowing," she said, adding that as the economy has improved, credit has loosened to allow more consumer spending.

"It may seem perverse, but when credit conditions loosen like this, it is indicative of an improving economy. And when people spend more, employment goes up. And when employment goes up, it's good for the economy."