A snapshot of American debt shows a troubling picture. See how your mortgage statements, credit card balances and payment practices compare with other Americans' bills.
By Kim Khan
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The average American has 2.7 bank credit cards, 3.8 retail credit cards and 1.1 debit cards, for a total of 7.6 cards per cardholder, CardWeb.com said. About 18% of all personal consumption expenditures in the country are made on bank credit cards. Add in retail cards and debit cards and the figure rises to 24%.
The most unsettling aspect of all these credit card transactions is that many Americans dont see their income as a spending cap. About 43% of U.S. families spend more than they earn, according to a Federal Reserve study. And on average, Americans spend $1.22 for every dollar they earn, according to Myvesta.org.
Are high debt levels threatening to dampen consumer spending, which accounts for about two-thirds of the U.S. economy? Bank One Chief Economist Anthony Chan says decidedly yes. He flatly predicts that consumers will spend less in 2004 because of the amount they are borrowing.
Household liability as a percentage of disposable income is at its highest level ever in the United States, Chan said. Yes, its too high. Next year consumer spending will probably lag growth in real GDP by a percentage point or even more.
To make up for the effect of the high debt burden, job growth will have to soar, he says. We need to see employment picking up and wages picking up before we see the consumer being able to avoid the impact of the high level of consumer credit.
The mortgage rush
Mortgage debt is the next major piece of the debt picture. In fact, the amount owed on mortgages dwarfs the amount owed on credit cards or other loans. The average principal amount owed on a mortgage is $69,227. Nearly 14 million homeowners, about 19% of all homeowners in the country, owe more than $100,000.
| American Housing Survey 2001 | | | National | Northeast | Midwest | South | West | | Median years left on mortgage | 29 | 29 | 28 | 29 | 29 | | Median outstanding principal | $69,227 | $70,516 | $58,966 | $59,848 | $102,264 | | Median total loan as % of value | 56.40% | 50.30% | 55.60% | 59.80% | 57.40% | | Median cash received in primary mortgage refinance | $24,513 | $27,839 | $19,362 | $21,219 | $28,431 | | Number of homeowners with 3+ mortgages | 1,008,000 | 220,000 | 265,000 | 301,000 | 222,000 | | | | | |
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Source: U.S. Census Bureau
Because of historically low interest rates -- often below 6% for 30-year loans -- many homeowners have been overborrowing, says Mark Zandi, chief economist at Economy.com. Debt loads were already onerous, and they have been borrowing very aggressively in recent years, he says.
According to the Census Bureaus latest American Housing Survey in 2001, about 15.4% of all occupied units had a primary mortgage that was refinanced. The most popular reason for the refinancing was a lower interest rate. But the second most popular reason was to receive cash. The median amount of cash a homeowner gained in refinancing was $24,513.
One result of all this borrowing: More than 1 million homeowners now have three or more mortgages on their property. Meantime, over 1.8 million owners have outstanding loans that equal 100% or more the value of their homes.
Among the effect of these statistics and trends: bankruptcy rates at record highs and foreclosure rates rising, Zandi notes. But unlike a recovering economy and labor market wont help ease the burden of mortgage debt, he says. An improving job market will makes the Fed more likely to raise interest rates, and even a small rise in mortgage rates could cool housing activity and hurt prices for existing homes.
The bankruptcy trend
The number of personal bankruptcy filings in the fiscal year ended Sept. 30, 2003, rose 7.8% from the same period in 2002, reaching 1,625,813, according to the American Bankruptcy Institute (ABI). Thats twice the number of people filing for personal bankruptcy protection in 1993.
The amount of debt as a percentage of personal income tends to track bankruptcy filings, the ABI said. And the amount of debt payments as percentage of income has steadily increased in the last 10 years, according to the Federal Reserve.
Entering the real world
A cap, a gown, a degree, maybe a hangover and an average of $20,000 in debt: Thats what graduating students are leaving college with.
In the 1999-2000 academic year, about 60% of students graduating with a bachelor's degree from a four-year public college took out a federal student loan at some time, with a cumulative average debt load of $16,100, according to National Center for Education Statistics. Thats up more than 36% from the average amount public university graduates borrowed just four years previously.
For students at private institutions facing larger tuition bills, the debt load tends to be even higher. In 1999-2000, about 66% of students graduating with a bachelor's degree from a private institution borrowed an average of $18,000, up more than 27% from the $14,100 they borrowed on average in 1995-96.
Credit card debt among students is also growing at a fast clip. In 2000, 78% of students had a credit history and credit cards, up from 67% a scant two years before, according federal student-loan financier Nellie Mae. The average credit card debt per student jumped to $2,748 in 2000, up more than 46% from the average of $1,879 in 1998. The percentage of students with four or more cards rose to 32% from 27%.
Is there any evidence at all that America's youth is learning some early lessons about debt? Well, it's not much to cling to, but the average number of credit cards per student fell to three in 2000 from 3.5 in 1998.
And yet, if recent history is any guide, the typical student -- rather than paying off that college debt in the working world -- is destined simply to gather more: The average U.S. household with a mortgage, two college graduates who borrowed money for school and more than one credit card, owes about $112,000. And that figure is only expected to rise.
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