Americans Still Hate Debt

Last year, the smart folks at McKinsey & Co. predicted U.S. households would be done shedding debt, or "deleveraging," by the middle of this year.

There's still time for them to be proven right -- and I think they are right -- but deleveraging continues at a good clip. Household debt fell by $110 billion in the first quarter, to a total of $11.23 trillion, according to the Federal Reserve. That's the lowest level in five years.

Broken out by the type of debt, here's where we're at:

The decline is due almost entirely to falling mortgage balances. Of the $110 decline in overall debt, $101 billion came from a decline in mortgages. Credit card balances fell by $19 billion, home equity lines of credit fell $11 billion, and student loans increased $20 billion. On net, we're shedding debt. Congratulations!

And since most Americans earn more today than they did five years ago (not adjusted for inflation), the debt-to-income ratio has really plunged. It's now at the lowest level in more than a decade, and down by almost a third since 2008:

Source: Federal Reserve.

Incomes and employment are still abysmal. But from a debt standpoint, American households are in a more stable position than they've been in in years.

A few other charts from the Fed's debt study caught my attention. Take this one:

Not only is the amount of debt in decline, but the number of accounts, particularly for credit cards, has plunged. Some of this is the cancelation of inactive cards. But there's also a trend away from credit toward debit cards. The number of Visa (NYSE: V  ) credit cards in circulation declined slightly between 2009 and 2011, while the number of Visa debit cards increased 18% during that time.

Meanwhile, credit card delinquencies have dropped to the lowest level since 2008. For those in the credit card industry -- dominated by Bank of America  (NYSE: BAC  )  and JPMorgan Chase  (NYSE: JPM  )  -- this is a leap in the right direction. The low-quality credits are being purged, the business is leaning out, and defaults are coming way down.

And check this out:

The number of new debt inquires dropped after 2008 and has stayed low ever since. So, not only are Americans distancing themselves from old debt, but they appear to have little desire to go down that road again.

Someday this will change. The deleveraging will end, and consumers -- stronger, more stable consumers -- will borrow again. But for now, Americans still hate debt.


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  • Report this Comment On May 14, 2013, at 6:32 PM, The1MAGE wrote:

    We started shedding debt years ago.

    When the "financial crisis" hit in 2008, my hours, and pay were hit as a result. my hours went down about 30%, and the days I did work my pay was down at least 20%.

    But something interesting happened. We had paid off so much debt that we didn't feel the downturn. We had more money in the bank then we ever did, and still kept on paying off more and more debt.

    Our following a strict budget, and eliminating debt ended up being more powerful then the deficit.

  • Report this Comment On May 16, 2013, at 8:04 PM, badnicolez wrote:

    Just because the balances have gone down doesn't mean that the debt is being paid off. I'd be interested in seeing a chart breaking out how much of the deleveraging was caused by default versus payment.

    You'd never know it by the headlines, but there are still a significant number of foreclosures happening throughout the country.

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