Economic Snapshot | Retirement

Consumer debt defaults, delinquency on the rise

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for April 3, 2002.

Consumer debt defaults, delinquency on the rise
The economy is doing better than many observers expected, largely because households continue to spend. The surprising strength of consumption is fueled by the easy availability of credit for new homes, renovations, cars, or other consumer goods. Thus, debt growth continued to outpace income growth throughout the recession.

But this trend has its price. In particular, loan defaults, or charge-off rates, have crept up slowly for the past two years, reaching their highest levels on record (see figure below). Charge-off rates on all consumer credit, which includes car loans, credit cards and similar types of loans but excludes mortgages and home equity lines, rose to an unprecedented 3.1% in the fourth quarter of 2001. Similarly, credit card charge-off rates reached a record high of 6.3% in the same quarter, and 4.8% of credit card loans were delinquent (i.e., at least six months behind in their scheduled payments).

Credit market weakness

This trouble in the consumer credit market clearly reflects the heavy debt burden that households are shouldering. The debt service burden, that is, how much consumers have to pay out of their disposable income to service their loans, reached the highest level since 1986 in the fourth quarter of 2001. At the end of last year, households paid 14.3% of their disposable income to service their loans.

With banks facing large losses and consumers feeling the pinch of the debt bonanza, consumer debt growth may slow down soon, just like it did last summer. When this happens, the economy will see lower consumption growth and thus slower overall growth.

This week’s Snapshot by EPI economist Christian Weller.

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