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Household Credit Shifts Higher; Debt Burden Continues to Decline

During the last recession, the aggregate level of household credit began to fall, raising concerns about the prospects for the recovery. The decline suggested that consumers could be scaling back their demands for credit and lenders could be unwilling or unable to lend. Finally, in the last two quarters of 2013, the total level of outstanding household credit has begun to rebound. Total consumer debt outstanding rose from $11.15 trillion in the second quarter of 2013 to $11.28 trillion in the third quarter and $11.52 trillion in the fourth quarter of the year.

Figure 1: Total Debt

Even though household credit has risen, the debt burden has not. Debt burden refers to the amount of consumers’ regular monthly payments, which are determined by the amounts they borrowed and their interest rates. The aggregate debt burden, the sum of all minimum payments consumers are required to make for all their outstanding debt balances, has been sharply declining since 2008. The end of 2013 showed a minor leveling off in this trend.

Figure 2: Debt Burden as a Percent of Disposable Income

The declining trend in the debt burden is driven mostly by two groups of consumers, those whose burdens increased year over year and those whose burdens did not change. The fraction of consumers with unchanged debt burdens began to grow steadily in 2000. In early 2000, it was 50 percent, in 2007 it was about 60 percent, and after the Great Recession it peaked in the third quarter of 2012 at 66 percent. Since then, it has fallen to 63 percent. Meanwhile, the fraction of consumers whose debt burden increased drastically declined from about 23 percent in the early 2000s to 15 percent in 2013. The share of consumers with decreasing debt burdens has been fluctuating around 18 percent for the last 13 years.

Figure 3: Debt Burden Breakdown

Prior to the crisis in 2007, there have been more consumers who had their debt burden increasing than those with decreasing burdens year to year. Since 2009, however, the pattern has reversed. The economy had more consumers whose debt burden was declining than those for whom it was increasing. In 2013:Q4, the gap between these two shares started closing, when the fraction of consumers with increasing debt burden reached 15 percent and those with decreasing burden reached 15.8 percent.

Figure 4: Debt Burden Breakdown

Consumers in different age groups show different patterns of debt burden before and after the last recession. Among individuals aged 30 to 39, those with increasing debt burdens exceeded those with decreasing burdens before the financial crisis in 2007. By the end of the recession, however, the proportions of the two groups were almost identical. Now the pattern seems to be returning to its former shape. In the last quarter of 2013, the fraction of those with increasing debt burdens was again higher than the fraction with decreasing burdens.

For people aged 40 to 49, the trend resembles that of the entire population. In 2013:Q4, the shares of consumers with increasing and decreasing debt burdens have become roughly even. In contrast, older age groups of 50-59 and 60-69 recently have a higher share of people decreasing their debt burden. Prior to the recession, these age groups were close to even or had a slightly higher share of people increasing their payments.

Figure 5: Debt Burden Changes Differently Over Time Depending on Consumer's Age

One major factor contributing to shrinking debt burdens has been low interest rates. As interest rates decline, debt burdens will also decline, even for the same amount of debt. The biggest part of overall consumer debt is mortgage debt, and with interest rates for mortgages at historical lows, many homeowners have had the opportunity to refinance at lower rates. The general refinance trend has followed the 30-year mortgage interest rate, and has recently begun to slow down.

Figure 6: Increasing Total Debt Burden Due to New Auto Loans

To gauge the impact of refinancing on the total debt burden, we looked at the number of consumers who experienced both a decrease in their debt burden and no change in the number of their open mortgages. This measure does not include homeowners who refinanced their homes at lower interest rates and shorter maturities, which could potentially lead to increases in their debt burden. According to this estimate, 30.8 percent of people who have decreased their debt burden did so as a result of refinancing their home. Consumers aged 40 to 49 and 50 to 59 made up the largest portion of people whose debt burden fell as a result of refinancing their home, contributing to 26.3 percent and 27.3 percent to total refinances, respectively.

Auto loans have showed strong growth since mid-2011, even though total debt was mostly on the decline. Part of the reason for this growth is, again, historically low interest rates. Of the people increasing their debt burden, 16.7 percent did so by purchasing a vehicle and adding a new auto loan. The most active consumers in the auto loan market were between the ages of 40-59. Combined, they contributed to about 50 percent to total new auto loans in 2013:Q4.

Figure 7: Decreasing Total Debt Burden Due to Refinances

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