Opinion Editorial | |
| Monday, March 29, 1999 | |
Consumer Debt Rising |
In recent months, consumers have been on a buying spree. In February, retail sales rose at an 11.4 percent annual rate, following a 12.9 percent rise in January and a 14.1 percent increase in December. Much of this buying was done on credit, leading some economists to warn that consumers are getting in over their heads. When they are finally forced to cut back, it could spell an end to the economic expansion.
To be sure, there are some danger signs in the consumer credit market. Last year, household debt rose by 8.5 percent, while personal income increased just 5 percent (see figure). Consumer installment credit outstanding as a share of personal income is now at an all-time high of almost 18 percent. With interest rates on credit cards averaging about 16 percent, many consumers are seeing their debts compound at a worrisome rate.
Not surprisingly, charge-off rates for bad debts are also rising. In 1997 banks were forced to write-off 6 percent of their credit card loans, a 25-year high. In part, this is due to the rising number of credit card holders, including many that would not have qualified in earlier years. According to the Federal Reserve, the percentage of households with one or more general purpose credit cards, such as a Visa or MasterCard, increased from 43 percent in 1983 to 66 percent in 1995. As the Fed study commented, "Credit card carriers in the 1980s seemed like an elite club; now it seems anyone can join."
This democratization of credit has also changed the profile of borrowers. They now have lower incomes, are more likely to work in unskilled jobs and less likely to be married or own a home. The median income of credit card holders fell by $4,700 between 1989 and 1995, while the average credit card balance rose from $1,134 to $1,671. As a consequence, debt as a share of income increased from 48.3 percent to 55 percent and debt payments went from 12.1 percent of income to 16.7 percent.
On the positive side, however, total credit card debt only rose by $69 billion last year. This is well down from the $139 billion increase in 1995. But more importantly, the rise in the stock market has greatly increased household wealth, which increased by more than $3 trillion last year. Between 1989 and 1995, the average stock and bond holdings of credit card users rose from $19,587 to $28,602. Thus rising debt has been more than offset by rising wealth.
Of course, a downturn in the economy or the stock market could quickly make tolerable debts intolerable. But for now, households do not appear to be over-extended or using credit cards excessively.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 25, 1999.
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