The Washington Post
By: Ylan Q. Mui
May 30, 2010
One of the big questions of the Great Recession is whether American consumers have truly learned their lesson.
For years, consumers spending beyond their means pushed the nation's economy into hyperdrive. Americans racked up record levels of debt, sending the savings rate into negative territory. And when the financial crisis hit, many found their personal balance sheets in shambles.
Recently, glimmers of a new, more fiscally responsible consumer have emerged. The number of late payments on credit cards dropped to a six-month low in March, according to Fitch Ratings. The personal savings rate has recovered to 3.6 percent, after falling for two months. American Express says more customers are making more than the minimum payment and paying off debt faster. The nation's outstanding credit card debt has fallen by about $100 billion over the past year.
"We are seeing loan balances shrink . . . and this is consistent with the industry trend," American Express Chief Financial Officer Daniel Henry told investors.
Yet some analysts say the picture is not so rosy. Card issuers have booted millions of the worst offenders off their books, which also reduces the amount of outstanding credit. During the first quarter, the rate of charge-offs hit another record high. Instead of consumers cleaning up, they argue, card issuers are simply clearing out the trouble spots. In addition, the stubbornly high unemployment rate and small gains in incomes will probably make it difficult for consumers to keep digging themselves out of debt.
"If we've learned anything from the credit nightmare," said John Ulzheimer, president of consumer education for Credit.com, "it's that we were partially responsible for it ourselves."
It's clear that at least some consumers have taken the lessons of the crisis to heart.
The plunge in home prices and the stock markets over the past two years -- an estimated $15 trillion in lost wealth -- shocked many people into slashing their spending. Not only did they save more, they also paid down debt and were reluctant to take on new loans. According to government data, the amount of disposable income that consumers must use to pay off their debt has dropped to less than 6 percent for the first time in more than a decade, an indication that American's debt load is dwindling.
The cholesterol analogy
The spike in late credit card payments has also abated. The percentage of consumers more than 60 days delinquent in their payments dipped in March to 4.27 percent, while those who were 30 days behind fell to 5.74 percent, according to Fitch. Although those results are still high compared with historical averages, they reflect attempts to improve personal balance sheets.
There is also a silver lining to stock market declines and low interest rates that have eaten into household wealth: It makes investing less appealing. Instead, many consumers have found that their dollars are better spent paying off debt, said James Chessen, chief economist for the American Bankers Association, a trade group.
"I think people are consciously understanding that relationship and taking advantage of it," he said.
Ulzheimer compared America's debt to a health problem: Often, we don't realize it exists until we get sick.
"It's like cholesterol. We don't pay so much attention to cholesterol until we get that test back from the doctor," he said. "We have a responsibility to do it better than we did three years ago."
Chastened by losses
Consumers are not the only ones scrutinizing their finances. Card issuers have restructured their business, lowering limits for many customers, tightening underwriting standards and revamping their risk models. They have lost billions of dollars on their credit card accounts, driven by consumers who were so far behind on payments that the companies wrote off those debts as losses.
According to government data, the charge-off rate for bank-issued credit cards hit 10.1 percent of all accounts in the third quarter of 2009, then declined slightly before climbing to that level again during the first quarter of 2010. Five years ago, the charge-off rate was 4.6 percent.
Such figures bolster arguments that even though banks have begun to repair their credit card portfolios, consumers have yet to find solid footing. In addition, the charge-off rate typically mirrors the nation's unemployment rate, which stands at 9.9 percent, because credit card payments are often one of the first bills that distressed consumers postpone.
"You have to get people reemployed and get incomes boosted before you see any significant reductions in credit card delinquencies," Chessen said.
Financial experts also note that people have few new resources to use in paying off their debts. Odysseas Papadimitriou, chief executive of the credit-card comparison site CardHub.com, said that was also evident last Christmas, when his analysis showed that consumers increased their credit card debt. Tightened lending standards could also make it more difficult for charged-off consumers to rebuild their credit.
"Reverting back to pre-recession debt levels is a horrible thing," he said. "That would mean we're just heading into another recession."
Experts said that although consumers and card issuers have made dramatic changes in the wake of the financial crisis, it remains unclear how long they will stick.
"I wish I could be more optimistic," Ulzheimer said. "But consumers generally have pretty short memories. So do lenders. It's not just a one-way street."