September 16, 2020 by Mark Hammerstrom
Last month I wrote that the United States had finally snapped a record streak of 23 consecutive quarters of increasing consumer debt. That is good news, especially given that the economy is on seriously shaky ground right now. It does seem that consumers pulled back on spending to some degree and the debt curve slightly flattened.
Not all of this is good news though. The fact is that consumer debt in the U.S. is still a whopping $14.27 trillion. Much of that is mortgage and student debt, but a large portion is credit card debt and auto loans. Those with mortgage and student debt did get some relief from the CARES Act, but those with credit card debt and auto loans did not. That is important because those who had only credit card debt or auto loans only received sporadic, temporary, and voluntary relief from lenders in addition to stimulus checks. Unfortunately, those temporary stop gap measures must inevitably go away and the debts come due. If the debts are not recoverable due to job loss or financial hardship, the rolling effects on consumers and lenders will be significant.
As mentioned in the earlier blog, high consumer debt is only sustainable if consumers have jobs and good wages to support the level of debt they have assumed. Once those underpinnings go away, trouble is on the horizon.
The New York Federal Reserve posted a blog in August titled “Debt Relief and the CARES Act: Which Borrowers Face the Most Financial Strain?” (Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, William Nober, Joelle Scally, and Wilbert van der Klaauw. Read it here). This blog looks at debt in more detail, specifically which consumers (broken down by type of debt, and the age and ethnicity of the consumer), are most financially vulnerable and at risk of significant financial harm.
Those with no mortgage or student debt mostly live in rural areas of the country and skew to older demographics. That is, older American debt holders either have paid off their mortgage debt or have never owned a home. Given their age, too, if they had student loans, they have paid them off as well.
The blog goes on to note, however, that once they drill down by income and ethnicity a much larger proportion of low income and minority debtors have the most credit card and auto loan debt.
Further, the credit health of the borrowers in these groups trend lower as well. The Fed blog notes: “Differentiating by neighborhood income, borrowers without any mortgage or student debt who live in low-income neighborhoods are considerably more likely to be in financial distress than those from high- or mid-income neighborhoods—as captured by both risk score and credit card delinquency. Differentiating by race, we find that borrowers without mortgage and student debt from Black neighborhoods are in markedly worse financial health than those coming from other neighborhoods”.
Of course, this data lines up with the groups most impacted by job loss and the economic downturn. Stimulus payments and unemployment go only so far and what comes next will be crucial to how debts get settled.
The fed notes that in many cases “…revolving debts are important for smoothing gaps in income.” While that works well when people are employed and can pay debts, the Fed goes on to warn: “…borrowers with already-delinquent credit card accounts are unlikely to be able to lean on these accounts to smooth consumption.” Meaning consumption and consumer spending declines further creating a negative spiral.
We all certainly hoped for a so-called “V” shaped recovery, but given that there is no new stimulus deal in sight from Congress, and re-employment from furloughs and layoffs lagging, it does appear an extended “U” will be the more likely scenario.
For a consumer with significant debt, it is crucial that communication be established with creditors to take advantage of any voluntary relief debt holders will provide. Do that now before debts fall into a place where more concerted action is necessary by the debt holder.
For debt holders, it becomes even more critical to get ahead of the curve and work with debtors to secure the outstanding debt while financial resources permit it. Of course, relying on debt collection professionals, such as United Credit Service, can also speed up payment.
Needing help navigating this difficult time? Call us. We are here to help.