Consumer Payment Card News

Household Debt Ratios Quickly Sink to New Lows

Household Debt Ratios

Household debt ratios for the third-quarter plummeted to levels not seen in more than 40 years. The Financial Obligations Ration (FOR) dropped 100 basis points (bps) over the past year, while the Debt Service Ratio (DSR) has declined 72 bps since the third-quarter of 2019, based on figures released by the Federal Reserve.

The sharp decline in both consumer debt metrics was accompanied by significant revisions for each quarter over the past four years. The seasonally-adjusted FOR dropped below 14% and the seasonally-adjusted DSR dropped below 9%, both unprecedented since at least the first quarter of 1980, according to analysis by RAM Research.

The FOR posted at 14.27% for the third-quarter (3Q/20), compared to a revised 13.74% in the prior quarter, and revised 15.24% for 3Q/19. The DSR reported at 9.13% for 3Q/20, compared to a revised 8.80% for 2Q/20, and a revised 9.85% for the third-quarter of last year, according to figures collected by CardData and PYRPTS.

Household Debt Ratio Analysis

The FOR peaked at 18.13% in the fourth-quarter of 2007. Since peaking at 13.22% in the fourth-quarter of 2007, the beginning of the “Great Recession,” the DSR has declined steadily since, dipping into single digits for the first time in the fourth quarter of 2012 (9.82%), according to CardFlash and CardBuzz.

The steady overall decline since the “Great Recession” (2008-2009), in both ratios, correlates with the overall economy and impacted by low unemployment, low interest rates, and a bullish stock market driven by the unnecessary 2017 tax cuts, notes Robert McKinley, Senior Analyst for CardWeb. However the impending “Great Depression,” in the wake of the global pandemic, has largely been held at bay by consumer spending stimuli and government monetary policies.

The household DSR is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
The FOR is a broader measure than the DSR. It includes rent payments on tenant-occupied property, auto lease payments, homeowners’ insurance, and property tax payments.

American Credit Card Debt

U.S. revolving credit, (97% credit card debt), decreased at an annual rate of 6.7% in October, compared to one-year ago, and follows a revised 2.2% YOY (year-on-year) increase in September and a revised 0.8% YOY gain in August, according to CardTrak.

U.S. revolving consumer credit stood at $979.6 billion at the end of October, compared to a revised $985.1 billion for September, a revised $982.5 billion for August, according to the latest figures released by the Federal Reserve earlier this month. At the end of 2019, Americans owed a revised $1094.2 billion in revolving credit.

On a quarterly basis, U. S. consumer revolving credit decreased a revised 4.9% YOY in the third-quarter, compared to a revised 30.8% YOY plunge in the second-quarter, and a revised 5.1% YOY increase in the third-quarter of last year. U.S. revolving consumer credit is now growing at a 2.18% CAGR (compound annual growth rate) since the third-quarter of 2015, based on analysis by Bankcenter.

2021 Consumer Outlook

While lenders, bankers and credit card issuers have gone to great lengths to extend forbearance by waiving fees, minimum payments, reducing interest rates, inevitably the damage inflicted to consumer spending (68% of the U.S. economy) will likely extend to beyond 2024.

All this, while home sales explode in some U.S. markets driven by record low mortgage rates.

Meanwhile, the irrationally over-valued stock market, coupled with cryptocurrency fever, propped up by interest-fee business money from the Feds has set the stage for something far more serious than a correction or a mild recession, concludes Professor Cardworthy. Throwing $600 or $2000 checks to consumers and extending unemployment payments is not going to cut it. It will require bold action such as cancellation of student debt, consumer credit card debt, monthly supplemental income payments, education grants for job retraining, unlimited funding of global vaccinations and a complete clawback of the 2017 corporate and “upper-crust” tax cuts coupled with major tax reform, suggests Professor Cardworthy.

U.S. Consumer Financial Obligations Ratio

(seasonally adjusted)

1Q/2017: 15.49%
2Q/2017: 15.42%
3Q/2017: 15.39%
4Q/2017: 15.35%
1Q/2018: 15.18%
2Q/2018: 15.10%
3Q/2018: 15.08%
4Q/2018: 15.10%
1Q/2019: 15.14%
2Q/2019: 15.24%
3Q/2019: 15.27%
4Q/2019: 15.27%
1Q/2020: 15.18%
2Q/2020: 13.74%
3Q/2020: 14.27%

U.S. Consumer Debt Service Ratio

(seasonally adjusted)

1Q/2017: 9.86%
2Q/2017: 9.83%
3Q/2017: 9.82%
4Q/2017: 9.81%
1Q/2018: 9.72%
2Q/2018: 9.69%
3Q/2018: 9.70%
4Q/2018: 9.72%
1Q/2019: 9.76%
2Q/2019: 9.82%
3Q/2019: 9.85%
4Q/2019: 9.86%
1Q/2020: 9.78%
2Q/2020: 8.80%
3Q/2020: 9.13%

U.S. Revolving Consumer Credit

2012: $845.2 billion
2013: $855.6 billion
2014: $888.0 billion
2015: $898.7 billion
2016: $960.3 billion
2017: $1018.1 billion
2018: $1054.6 billion
2019: $1094.2 billion
2020: $ 979.6 billion (Oct)

3Q/2019: $1084.9 billion
4Q/2019: $1094.2 billion
1Q/2020: $1078.1 billion
2Q/2020: $ 995.0 billion
3Q/2020: $ 985.1 billion
4Q/2020: $ 979.6 billion (Oct)

Source: Federal Reserve; RAM Research; CardData; CardTrak; CardFlash; PYRPTS; Bankcenter; CardWeb; CardBuzz; Cardworthy; PYVNTS; Robear’s List; Ruebud Media; Red 3 Media

Household Debt Ratios