America's Consumer Debt Delinquency Crisis

A recent study by the Urban Institute and the Consumer Credit Research Institute looks at debt delinquency in the United States.  Before we delve into the contents of this study, let's look at how much commercial bank consumer debt there is out there according to FRED:

According to the Federal Reserve Bank of St. Louis, there is a total of $1.17 trillion in consumer loans outstanding at America's commercial banks.  At the beginning of the Great Recession, there was "only" $798.1 billion in consumer debt in December 2007.  This means that consumer debt to the commercial banks alone has risen by $372 million or 46.6 percent in less than seven years.

If we look at total consumer debt including housing and non-housing debt, this is what we find:

In the first quarter of 2014, total household debt was $11.65 trillion; $8.69 trillion of which was housing debt and $2.96 trillion of which was non-housing debt.  Here is a chart showing the quarter-over-quarter and year-over-year changes by debt category for Q1 2014: 

We should also bear this graph in mind:

While consumer confidence has improved since the depths of the Great Recession, it is still below its historical inter-recessional levels, particularly if one looks back to the period between 1995 and 2000.

Now, back to the study.

The authors open by noting that their study used data from TransUnion to measure the number of Americans that are at least 30 days late on a non-mortgage payment.  This data represents only Americans with credit files and does not include the 22 million American adults that have no credit file.  In general, these non-represented people tend to be low-income and cannot access credit meaning that they generally do not have overdue debt.

Here is a map of the United States, with the census tracts coloured according to the percentage of adults that have debt that is past due with the darker blue colours representing a higher percentage:

On average in the United States, 5.3 percent of adults have credit that is past due.  

Now, let's switch gears for a moment and look at how many Americans have debt that is in collections.  A shocking 35.1 percent or 77 million Americans have debt that is currently in collections and the average amount of debt being collected is $5178.  Interestingly, the average household income for debtors that are past due is $72,274, well above the median household income with four family members of $67,457 in 2013. 

The areas with the highest share of past due debt and debt in collections are found in the South, particularly the East South Central and West South Central parts of the United States as you can see with the concentration of darker blue colours on the previous map.  In the East South Central region, 6 percent of people have debt that is past due and 41.3 percent have debt that is in collections.  In the West South Central region, 7.5 percent of people have debt that is past due and 43.6 percent have debt that is in collections.  Around 40 percent of the census tracts with the highest concentration of debt that is past due are found in Louisiana and Texas.

Of the states, Nevada has the highest percentage of people with debt in collections at 47 percent.  The District of Columbia (41.8 percent), Alabama (41.7 percent), Arkansas (40.2 percent), Florida (41 percent), Georgia (42 percent), Kentucky (41.9 percent), Louisiana (43.8 percent), Mississippi (44.7 percent), New Mexico (40.8 percent), North Carolina (40.3 percent), South Carolina (46.2 percent), Texas (44.7 percent) and West Virginia (41.5 percent) all have more than 40 percent of their people with debt collections.

The states with the lowest percentage of people with debt in collections are Hawaii (22.7 percent), Massachusetts (23 percent), Minnesota (19.8 percent), Nebraska (23.9 percent), North Dakota (19.2 percent), South Dakota (20.8 percent) and Vermont (23.7 percent).

If we look at the amount in collections, Nevada comes in first with $7198 followed Wyoming at $6803, Alaska at $6443, Florida at $6396 and Arizona at $6224.

What I found interesting about the study was that there was a tenuous relationship between debt problems and income level.  While areas with lower household income tend to have more people with  debt that is past due, the mathematical correlation of -0.3 suggests that there is more to debt problems than income levels.

The danger of debt in collections cannot be understated.  Debt in collections is a result of failing to make a payment on an outstanding bill which can include medical bills, credit card bills or utility bills among others.  This problem can haunt consumers for many years, impacting their ability to get credit in the future and their ability to "get ahead". The high number of Americans with delinquent debt suggests that the financial distress being experienced by many families since the "end" of the Great Recession is far from over.  To at least some extent, we have the Federal Reserve's easy money policies to thank for making credit appear to be the cheapest it has ever been.  America's consumer debt problems may also go a long way to explaining why consumer sentiment is still well below historical levels.  In our consumer-driven economy, this negative sentiment is reflected in the very modest growth levels of the economy as a whole.