Well it is that time again.  Time to get a little wonky and update you all on the state of consumer debt.

The headline?  According to the New York Federal Reserve, we have reached yet another record for total household debt:  a whopping $13.29 trillion!

I don’t know about you but to me $13.29 trillion is a big number.  Perhaps a number that big is meaningless until we actually look at it like this:  $13,290,000,000,000.

So how much is that really?  To put it in perspective, according to Wikipedia, the Gross Domestic Product of the United States of American in 2017 was $19.3 trillion.  The European Union as it is presently comprised was $17.3 trillion.  After that, our debt exceeds the GDP of countries as large as China and Japan, and dwarfs the GDP of the individual members of the EU and every other country in the world.

Frankly I find that stunning.

And there does not seem to be an end to this record setting trend.

Here are some key statistics from the New York Federal Reserve in their report for the second quarter of 2017 (read the summary here, published in August, 2018):

• Total household debt rose to $13.29 trillion, increasing for the 16^th straight quarter.
• We added another $82 billion in household debt during this period.
• Since we are talking record books here, this is $618 billion higher than the previous peak reached in the third quarter of 2008.
• The New York Fed points out “…overall household debt is now 19.2% above the post-financial-crisis trough reached during the second quarter of 2013.”

Some specifics:

• Mortgage originations edged up to $437 billion.
• Mortgage delinquencies improved: 1.1% of mortgage balances are 90 or more days delinquent versus 1.2% in the first quarter.
• Auto loan balances increased by $9 billion in the quarter, to $1.24 trillion.
• Credit card balances increased by $14 billion, or 1.7%

What about Delinquencies?

According to Wilber van der Klauw, the Senior Vice President at the New York Fed: “While overall delinquency rates have remained stable at relatively low levels, transition rates into delinquency have fallen noticeably for student debt over the past year, reflecting an improved labor market and increased participation in various income-driven repayment plans.”

One could certainly say that last is very good news for those who have faced the bleak prospect of repaying huge student loans.

Some other notes from the New York Fed:

• Credit card delinquency rates went down slightly: 7.9% of balances are 90 or more days delinquent as of June 30, versus 8.0% at March 31.
• The number of credit inquiries in the past six months (an indicator of consumer credit demand) basically remains unchanged. The Fed points out that this is among the lowest levels seen in the history of the data.
• Consumers with an account in collections fell 23.4% between the third quarter of 2017 and the second quarter of 2018, from 12.3% to 9.4%, largely due to changes in reporting requirements of collections agencies.

With regard to this last point, several members of the New York Fed published a companion blog titled “Just Released: Cleaning Up Collections” (see cite below* and read it here) which specifically addresses the changes in credit reporting requirements and how they affected credit scores.

“The downturn was a result of a change in the required reporting practices that impacted collections accounts specifically, known as the National Consumer Assistance Plan (NCAP), which rolled into effect during the second half of 2017.”  They point out that those benefiting the most were individuals with low credit scores to begin with.

“All in all, the changes in credit reporting prompted by the National Consumer Assistance Plan have resulted in an $11 billion reduction in the collections accounts balances being reported on credit reports. A total of 8 million people had collections accounts completely removed from their credit report.”

They go on to say: “However, collections accounts do indeed align with other negative events and the cleanup of collections accounts had the largest impact on the borrowers with the lowest scores. These borrowers will certainly benefit in the long run from the cleanup of their credit reports, since higher scores are associated with better access to credit, to the job market, and even to the rental housing market.”

Yet there is a warning here (emphasis added): “…But the immediate impact of the removal of collections will be muted if the beneficiary’s credit record continues to be tarnished with other negative information…We also think that in the longer-term there may be a rebound in collections account reporting because creditors will likely begin collecting the newly required personally identifying information as they adjust to this reporting change.”

Thus, while credit reporting continues to be a vital tool for both the collection industry and businesses extending credit in general, this change may have the unintended consequence of providing easier paths to credit for those who may be already be financially on the edge.

Good news, bad news?  So it would seem.  As long as the economy continues to be healthy and employment high, these high debt levels seem to be sustainable.  However, vigilance is again strongly suggested when monitoring the status of receivables.  Staying on top of delinquent accounts is critical to a company’s financial health. We are here to 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 13 years.

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