Coal in our Christmas Stockings? Consumer Debt Hits Another Record

I suppose one could argue that having coal in our Christmas stockings is not necessarily a bad thing.  In the 19th century, a lump of coal just may put off freezing to death for another day.  A good thing.

But we are in the 21st.  I wonder how many of us have even seen a lump of coal, let alone used one for something useful.  Heck, even our barbecue grills rarely use charcoal anymore.  Most use propane.  Even our powerplants are converting to natural gas.  The piles of coal that once filled the power plant yards are disappearing as I write.  A good thing if you live near one as I do.

So, if you get a lump of coal, what to do?  Good question. May I suggest you regift it to the politician of your choice?  Please don’t send it to your faithful blogger; I have enough to empty out from last Christmas.

But I digress (again).

I beg to report that once again we have to reckon with a lump of coal in the form of the rising level of consumer debt, which once again reached historic levels in the third quarter.

To be clear: not just historic, but unprecedented.  Highest of all time.  We have never seen anything like this amount of consumer debt.  Ever.

Good or bad?  You can be the judge.  On the one hand, as we continue to experience low levels of unemployment, we should be able to afford to pay our debts.  Certainly, the argument is that consumer spending, with the resultant high levels of debt, is powering the economy.  On the other hand, it won’t take much to wiggle us into a difficult spot.  And we have plenty of things, nationally and globally, that can start the wiggle. More on this last later in the blog.

Here is the latest for the third quarter (from The New York Federal Reserve “Quarterly Report on Household Debt and Credit” read it here):

  • Total household debt increased by another $92 billion to $13.95 trillion
  • This is the 21st consecutive quarter with an increase in household debt
  • We have exceeded, by 3 trillion, the last peak reached in 2008 ($12.68 trillion).
  • Mortgage related debt increased by $31 billion, the largest component of household debt
  • Other types of debt all increased by an aggregate $64 billion including:
    • $18 billion in auto loans
    • $13 billion in credit card balances
    • $20 billion in student loans.
  • Not good news: “Aggregate delinquency rates worsened in the third quarter of 2019”.
    • As of September 30, 4.8% of outstanding debt was in some stage of delinquency
      • This is a 0.4 percentage point increase from the second quarter due primarily to increases in early delinquency buckets.
      • Of the $667 billion of debt that is delinquent, $424 billion is seriously delinquent (at least 90 days late or “severely derogatory”, which includes some debts that have previously been charged off that the lenders continue to attempt collection).

So, what happens from here?  I suppose it is anyone’s guess but given what appears to be the start of a very robust holiday spending season, we will reach another new record in the fourth quarter.  A lump of coal to me if I am right?  Bring it on I guess but this trend clearly is not sustainable.

What can go wrong?  Well, for one thing, our personal financial health can begin to deteriorate.

A measure of the financial health of the consumer has recently been published by the Consumer Financial Protection Bureau (CFRB).  While opinions on the effectiveness of the CFRB vary, their recent report “Financial Well-Being by State” (read the full report here) attempts to analyze how consumers view their financial well-being by age and then by state.  The intention is to spotlight differences in age and financial well-being and highlight areas of the country that need to pay particular attention to financial education efforts.

The ACA International (a business association for collections professionals) published a summary of the CFRB report (read it here). They write:

“According to the CFPB, financial well-being is defined as the state wherein an individual has a sense of:

  • Control over day-to-day and month-to-month finances;
  • Capacity to absorb a financial shock
  • Being on track to meet financial goals;
  • And the ability to make financial choices to enjoy life.”

The ACA notes “Financial well-being varies by age and where consumers live…on average adults ages 18 to 61 have a score [of 49] reflecting minimal savings and some difficulty making ends meet…”.

“A score of 49 is at the top of the medium-low financial well-being score range…”:

  • Most (60%) of adults in this range have minimal savings of $250 or more, but only 30% have $2,000 or more in savings.
  • Almost all of adults in this range (80%) find it somewhat or very difficult to make ends meet.
  • Some (32%) have had a credit card application rejected or are concerned about credit rejection.”.

That is pretty alarming when we add on our unprecedented the state of indebtedness.

Digging deeper, even lower scores have arguably unrecoverable financial problems.  Again, this varies quite a bit by state. From the ACA:

  • “In the very low category, (a score of 0-29) just 5% of adults in that group are certain they could come up with $2,000 for an emergency; while most (82%) sometimes or often experience “food insecurity” or “food hardship,” according to the CFPB.
  • In the low category (a score of 30-37); few (23%) save money on a regular basis and only some (38%) have more than $250 in liquid savings. Nearly half (45%) of adults in this group said they have experience with debt collectors.”

The ACA concludes: “The CFPB’s findings can be a benchmark for the accounts receivable management industry to consider when communicating with consumers and developing manageable payment plans.”

Coal for the holidays?  Let us hope not.  The bright side is that basically half of us do pay our bills, have the means to do so, and feel pretty confident about our financial well-being.  When circumstances warrant, however, we are here as your experts to help with your receivables management.  We are the experts in working with clients to optimize their recoveries.  Let us help!

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

image provided by: creative commons

 

Debt Collection: Trick-or-Treat?

I bet I know what you’re thinking—trick. Tell someone you work for a collection agency and their reaction can pretty much be summed up with one word—yikes! That’s because ours is an industry that is typically thought of negatively. There are a few other professions I can think of off the top of my head that are met with a similar reaction. How many bad jokes can you think of involving car salesmen, IRS agents, lawyers, or cable TV providers?

Do you know why? In part, I believe that in each of these cases, society has let the actions of a few taint the way they feel about an entire industry. It’s just another case of the light shining the brightest on a few bad actors. It ruins it for the rest of us! Kind of sad.

As much as it pains me to admit, I know there are some collection agencies out there behaving dishonestly and treating consumers disrespectfully. But I think that only accounts for part of the reason the collection industry is not liked. Let’s face it, when money—sometimes a lot of it—is involved emotions can run high and sometimes you just want to shoot the messenger.

Good or bad, the fact is, the U.S. economy revolves around consumption. When low-cost money is available to consumers they spend, and when they spend it propels the economy. Those who provide the credit, goods and services do so expecting to be repaid. And when they don’t, that’s when we come in.

Have you ever stopped to think about what happens to businesses that don’t get paid? Bad debt can create serious financial problems for any business.

I’m sure you’ve heard the old saying There’s no such thing as a free lunch. We have a similar one that goes around our office. There is no such thing as an unpaid bill. They both are a takeoff of the economic theory that whatever goods and services are provided, they must be paid for by someone. In the case of the “free lunch” it’s true that bars in Milwaukee and other cities around the country used to advertise “free lunches” to get patrons into their establishments during the noon hour. And while they did not charge for the lunches—make no mistake—the consumed food was paid for with the profits made from the many beers and other alcoholic beverages customers bought to wash-down their lunches. And in the case of the “unpaid bill” believe me it will be paid for—in the form of increased prices, layoffs, tax increases, business closures, and unavailable services or goods.

Here’s a staggering and sobering statistic. According the Federal Reserve, the total amount of consumer debt in the U.S. exceeds $15.5 trillion!

In 2016, ACA International; the Association of Credit and Collection Professionals, hired global advisory firm, Ernst & Young, to conduct a study of third-party debt collectors. Their survey reported recoveries of $67.6 billion in 2016 alone. This recovered consumer debt had a significant positive effect on the nation’s economic health. Check out the results below:

Providing America Jobs
– Direct Collections Jobs: 129,262
– Direct Payroll: $5 B

Paying Taxes
– Direct State / Local Taxes: $677 M
– Direct Federal Taxes: $852 M

Giving Back
– Charitable Contributions: $17.8 M
– Employee Volunteer Hours: 521,700

Even with those few bad apples, a huge majority of this bad debt was collected by ethical debt collectors who treat consumers with the dignity and respect everyone deserves. There are many reasons why people do not pay their bills and reputable third-party collection agencies like A. Alliance can work through issues to find amicable solutions for both creditors and consumers.

If you find yourself in a situation where you have a debt you are having difficulty paying, there are resources out there to help.  For example, Ask Doctor Debt at www.askdoctordebt.org. is a free—literally free—website that can answer questions regarding debt collection and the laws that are there to protect you. Right now, they are in the process of updating their site so it will be bigger with more comprehensive information on a wide range of topics pertaining the credit and collections.  I can’t wait to see it when it’s done.

So…debt collection, trick-or-treat? I hope you’ll rethink your answer.

Best wishes for a safe and happy Halloween!

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

Image provided by: Derren Brown – wikimedia

 

Go Ahead, Pile on the Debt! Have We Reached a “Tipping Point”?

Perhaps you have read the book by Malcolm Gladwell called The Tipping Point.  If you have not, it is worth a read.  There is a lot in it despite being a pretty short read.  In summary, Gladwell points out a number of phenomena that can be traced back to a single, often simple, cause which in turn caused a much larger, and often very drastic, change.  I am oversimplifying a bit, but watching world events, financial market behaviors, and ongoing trade wars and political conflicts, I wonder if we are about to reach a significant “Tipping Point” for the American economy and perhaps the world?

I know that is a broad suggestion, and one that is often associated with being a ‘Debbie Downer’ these days.  Yes, the economy continues to be robust.  Employment is at all-time highs.  New job creation continues apace with wages increasing.  Consumer sentiment is strong and the economy growing. 

Yet I can’t get the enormous amount of consumer debt off my mind.  It hangs like a storm cloud over an otherwise pretty rosy financial picture.  As we all know, though, roses have thorns and sometimes that light we see at the end of the tunnel turns out to be a freight train!

Once again, we find ourselves at record levels of consumer debt.  The New York Federal Reserve just published its report for the second quarter of 2019, and it continues to show that we still seem to have no end to our appetite for personal debt accumulation (read the press release here). 

No surprise, we set yet another record!

Some highlights of this quarter’s report are:

  • The headline from the Fed is “Total Household Debt Climbs for 20th Straight Quarter…”
  • Household debt now stands at a whopping $13.86 trillion.
  • This is a $192 billion increase from the first quarter.
  • The report points out that “Balances have been steadily rising for five years and in aggregate are now $1.2 trillion higher, in nominal terms, than the previous peak (2008Q3) of $12.68 trillion. Overall household debt is now 24.3% above the 2013Q2 trough.”
  • Mortgage related debt stood at $9.4 trillion, a $162 billion increase.
  • Non-housing debt increased by $37 billion in the second quarter
    • New auto loans totaled $155 billion, a $17 billion increase   
    • Credit card balances totaled $868 billion, a $20 billion increase
    • Some good news was that there was an offsetting $8 billion decline in student loan debt.
  • Credit card balances in the 90+ day delinquency range rose to 5.2% from 5.0%.

Unfortunately, an increasingly important part of this debt is from so called ‘shadow banking’ institutions and should cause concern as well.  Consumers that may otherwise not qualify for credit from traditional sources often turn to these institutions to finance their purchases.  That does not help stabilize the debt picture, however.   

Granted, as long as employment stays strong and wages continue to rise consumers can continue to finance their debts.  

Most recently, however, the bond market began to flash warning signals of a potential recession.  Of course, that can force companies to tighten their belts, cause static or negative job and wage growth, which in turn can cause significant financial turmoil.  With little savings, or other financial cushions, to protect consumers during hard times (which surely will come) the “Tipping Point” represented by personal debt will continue to shadow us for a long time.

What can you do now to protect your business?  First, as we have previously suggested, make sure to review your credit policies and stay on top of your receivables.  Make sure that your customer records are as complete and accurate as possible. Finally, make sure to turn your delinquents over as soon as possible for prompt and efficient collections action.  We are here to help.  Let the professionals at A. Alliance show you how. 

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.