Home > Managing Debt > In Positive Fed Debt Report, Hidden Danger Lurks

Comments 1 Comment

American consumers owe less and are paying their bills on time more, the New York Federal Reserve said in a report released Wednesday. The results certainly sound cheery, but debt data is notoriously subject to interpretation. What’s true for you is also true for the country: Some debt is good, other debt is bad, no debt is even worse, but too much debt is really, really bad. As we’ll see, the housing market recovery makes this data look better than it actually is, and a continuing rise in student loan debt still threatens the health of the economy.

So let’s unpack the Fed’s report.

Total household debt, including home loans, auto loans and credit cards, fell slightly (by $78 billion) in the second quarter of this year, enough to reach its lowest level since 2006. That’s good.

A dip in mortgage debt accounts for all of that drop and then some, the result of consumers paying down home loans and an uptick in the housing market that allows owners to sell homes and pay off mortgages. That’s good.

The rate of consumers who are more than 90 days late on a bill fell to 5.7 percent, the lowest rate since 2008. That’s great.

But consumers are taking on more debt, too. Mortgage originations, auto loans, credit card balances and student loans all rose.  That’s a mixed bag.

Some additional credit card debt is a good thing for the economy, if it represents consumers emerging from the bunker mentality of the Great Recession and feeling free enough to spend. But some of those consumers may be reverting to bad credit card spending habits, or turning to plastic as a last resort to replace missing income. The data doesn’t offer much guidance on that.

Student loan borrowing rose by $8 billion, pushing the total outstanding debt just shy of $1 trillion, at $994 billion. The total now dwarfs outstanding credit card debt of $668 billion. That’s terrible.

New auto loans surged by $14 billion, reaching their highest level since 2007. This is great news for Detroit. But is it just a re-priming of the debt bubble? Are auto dealers goosing the auto market by lending to risky borrowers again? The Fed doesn’t think so. Only 23 percent of new loans were taken by borrowers with credit scores under 620, which is historically on the low side. Good.

The Story Behind the Numbers

But there is a big asterisk attached to this good news story. Lurking inside this surge of borrowing to buy cars is an alarming truth — 18- to 29-year-olds aren’t borrowing money to buy cars anymore. They may be shunning automobiles altogether and opting for ride share programs and other alternatives, or they may simply be too busy paying off student loans to take out car loans. (The New York Fed had earlier described a negative correlation between student loans and car loans, which seems irresistibly logical.)

This younger group is taking out 50 percent fewer auto loans than it did a decade ago, and the Great Recession seems to have erased them from the market altogether. Car borrowing among this group is not recovering as it is among the older set. Detroit has a serious long-term problem.

Finally, is increased borrowing in the housing market a good or a bad thing? It’s undeniably good for people who have been stuck in underwater homes since the recession began. Earlier this year, the National Association of Realtors said the median time on market was 41 days for homes for sale, down from 72 days in May 2012. Keep a skeptical eye on the housing recovery, however. The hottest markets are — sound familiar? — Florida and California. CNBC and others are already throwing around the “B” word again, as in bubble.

Debt is neither good nor bad, it’s a tool. Gradual upticks in borrowing, accompanied by signs that consumers are repaying, is a great sign for the economy. But don’t be fooled by lower overall household debt numbers, made rosy by the inevitable housing recovery. So long as young Americans live under a rock of debt and are prevented from living as normal, 20-something consumers, the economy’s long-term health is in peril.

Image: George Doyle

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team