Source: US Federal Reserve Board

Consumer Debt

We’ve gathered together some statistics form the Federal Reserve as well as the latest US Census bureau about American’s indebtedness, savings as well as consumption behaviour. Here are some interesting results you can use for your own sake. See where you stand and how you can improve your situation.

In the United States, the total amount of consumer debt is about $2.5 trillion dollars. This amount can be compared to nearly $8,100 of debt for every person that lives in the United States. Consumer debt is debt incurred following the purchase of consumer goods, and on which interest payments are not tax deductible, unlike interest paid on a mortgage, which is considered investment debt. So the $8,100 of debt per person doesn’t include mortgage, which makes this amount even more impressive.

Consumer debt can include revolving credit and non-revolving credit. Revolving credit is repeatedly available debt; it is credit that does not have a fixed number of payments, such as credit cards. Non-revolving credit is credit that can not be used again once it’s been consumed, such as student loans, auto loans, etc. The graph on the left illustrates the proportion of revolving and non-revolving credit of the consumer debt in the United States.

The most common type of revolving credit is credit card debt. In 2008 the average American consumer had 13 different debts to repay on record; 9 of which were credit cards and 4 of which were likely to be non-revolving credit. The average household credit card debt at the end of 2008 was US$10,679. In the last decade, debt became more acceptable and much more accessible. Expenditure increases have been higher than income growth leading to household indebtedness.

Statistics from the Federal Reserve dating back from November 2009 indicate that the household debt service ratio was at 13.1%.  Household debt service ratio is a proportionate indication of the disposable income (after tax) going towards all debt payments. Take the time to see where you stand compared to this average. What proportion of your disposable, after tax income, do you use to pay off mortgage obligations and consumer debt such as auto and personal loans?

Savings

While debt has been increasing, the level of savings by American households has diminished considerably at only 3.4% of disposable income in 2008 compared with 10.8% in 1990. Financial experts recommend a rough guideline of 10% of your income for your savings. Where do you stand in terms of savings?

However, with the recent events, consumers’ attitudes towards spending are changing as thriftiness is becoming trendy. Why? Mainly because of the slow income growth, high inflation rates and big decline in housing prices that have led to wealth decrease.

But the fact that people are willing to change their consumption patterns doesn’t make it easier. This is an ongoing, everyday effort. Since a lot of people were living beyond their means, it is now hard to change their lifestyles and deprive themselves of their established consumption habits and the comfort gained over the years.

Therefore, the actions taken by the middle class at the beginning were not as drastic:

• People are looking for the same product being offered elsewhere at a lower price (e.g.: replacement of the supermarket format by the bigger and cheaper hypermarket format such as Sam’s Club.)
• They switch to a cheaper alternative
• and finally, if there is no choice, they cut back expenditure on this category.

The graph below shows the savings ratio history since 2004 and we can clearly see an increase since 2007.  (Savings ratio is the proportion of household disposable income which is saved.)