The Seven Deadly (Debt) Sins

Consumers have worked hard to pare debts but as the economy turns weaker, much remains to be done.


When your computer is locked up and you're staring at the blue screen of death, hitting the reset button is often the only remedy. It's scary, isn't it? I'm always worried my computer will never come back to life and that, somehow, this marvelous machine has died for good. Increasingly, our economy is behaving like the blue screen of death. It's locked up. Things don't work -- no new jobs, no new loans, no investment gains, and no sustained movement to solve our enormous budget and economic problems.

We, too, have been hitting our personal reset buttons during the past two years. So have banks and other financial companies, but their job has been made a lot easier because they're using free money from the Federal Reserve. We don't get free money. And because consumer spending drives our system, our economy certainly hasn't rebooted yet. And as detailed information about consumer behavior comes to light, it's clear that individuals are nowhere near the end of their personal rebooting process. Looking at some recent history paints a sobering portrait of how long a national "credit cure" could take.

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"About 496,000 individuals had a foreclosure notation added to their credit reports between March 31 and June 30, an 8.7 percent increase" from the first quarter of the year, according to a recent report from the Federal Reserve Bank of New York. "New bankruptcies noted on credit reports rose over 34 percent during the quarter, from 463,000 to 621,000. While we usually see jumps in the bankruptcy rate between the first and second quarter of each year, the current increase is higher than in the past few years, when it was around 20 percent."

Total outstanding consumer debt was $11.7 trillion at the end of June, according to the report. That's down from a peak of $12.5 trillion at the end of Sept. 2008, following a consumer borrowing frenzy. Consumer debt at the end of 2004 was "only" $8.9 trillion but had soared to $11.2 trillion by the end of 2006. On an individual basis, the average amount of debt carried by consumers with credit reports was $48,821 at the end of June, down by $3,509, or 6.7 percent, from $52,330 two years earlier. To appreciate how much our appetite for credit has grown, the average amount of debt carried by consumers 10 years ago was less than $24,000. Personal indebtedness today is much higher in formerly hot real estate markets. In western states, for example, the average per capita debt load of people with credit reports was nearly $70,000 at the end of June.

Looking at the past decade, consumers stayed current on 95 to 96 percent of their loans when the economy was healthy. But in 2007, late payments and delinquencies began a sustained rise. From 94.7 percent in June 2007, the percentage of loans that were current fell to 92.3 percent a year later, to 88.8 percent by the middle of 2009, and to a low of 88 percent at the end of last year. The percentage of consumer loans that are current has since edged up. It stood at 88.6 percent at the end of last June.

Here's a look at seven major categories of personal debt, including the progress we've made and how far we still have to go.

1. Mortgages: $8.7 trillion, down from a peak of $9.3 trillion in Sept. 2008. Despite regular news reports about people walking away from underwater mortgages, the broader story is how hard people are fighting to keep their homes. Still, more than seven million homeowners are behind on their payments or in foreclosure, according to the Mortgage Bankers Association. And while the picture may not get bleaker, that's still an enormous drag on consumer finances and, of course, on prospects for a housing recovery. Loan restructuring and work-out programs can only provide limited relief, experts say. The best elixir is an economic recovery that creates the jobs needed to better support home payments.

2. Home Equity Loans: $680 billion, down slightly from more than $700 billion for the past six quarters. This trend masks some opposing forces. The decline of home prices and high delinquency and foreclosure rates have reduced the availability of home equity loans. But the weakness of the economy likely has forced more strapped consumers to seek spending money by taking out installment loans using the equity in their homes as collateral.

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3. Credit Cards: $740 billion, down from $870 billion at the end of 2008. Consumers have cut back sharply on the numbers of credit cards they use and the total of outstanding cards has recently steadied at about 380 million accounts. Still, the Fed noted, this is down 23 percent from two years ago. Over that same period, it reported, the average outstanding balance on a credit card has fallen to about $745 from $850. The limit on how much can be charged on an average card has declined more sharply, to about $1,955 from $2,820. Recent changes to credit-card rules should further help consumers by lowering or limiting late fees and other charges.

4. Auto Loans: $680 billion, down from more than $800 billion for most of the 2006-2008 period. Without the government's cash-for-clunkers program, who knows how low this figure might have fallen? Still, current auto debts are more than double what they were a decade ago, before the nation got so seriously hooked on credit.

5. Payday Loans: no authoritative data is available on outstanding loan volumes. The level of outstanding debt at a single time, industry sources indicate, may be no more than $50 billion. But that's a misleading gauge of this sector's impact on its largely lower-income customers. Payday loans are churning machines. It's not unusual for a person to have borrowed from a high-interest lender several times during a year. Their outstanding loan balance at any time is only a few thousand dollars but the cumulative amount of interest they've paid on their rotating loan easily can equal or even exceed that level.

6. Education Loans: $510 billion, continuing a constant rise from only $300 billion three years ago. Despite pro-consumer improvements to student loans, some analysts see this as another credit bubble set to burst. A recent government report says student loan repayment rates at many for-profit colleges are so low -- as in only 20 percent -- that some schools may no longer qualify for the loan program.

7. 401(k) Loans. Borrowing from a retirement plan is perhaps the saddest debt sin of all. Yet more and more of us are doing this, according to a report from Fidelity Investments. So-called hardship withdrawals from 401(k) plans are rising, and many of the people who felt forced to take money out of their plans last year are doing it again this year. Besides robbing from their future retirements, people forced into early withdrawals also get to pay a penalty tax on the withdrawal. This indicator is an especially painful lesson that lots and lots of people have been on the financial ropes for years. There has not been a recovery for them.

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