NCPA - National Center for Policy Analysis

Consumer Debt Rising

March 29, 1999

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 when consumers are finally forced to cut back, it could spell an end to the economic expansion.

  • Last year, household debt rose by 8.5 percent, while personal income increased just 5 percent.
  • Consumer installment credit outstanding as a share of personal income is 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.

Not surprisingly, charge-off rates for bad debts are also rising. In 1997 banks wrote off 6 percent of their credit card loans, a 25-year high. Average borrowers 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 -- down from the $139 billion increase in 1995. But 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.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 25, 1999.


Browse more articles on Economic Issues