Second quarter sees household debt declines once again

Consumers have been trying to get out from under large amounts of debt since the end of the recent recession, and new data shows that they were successful once again in the second quarter of the year.

Overall household debt fell $53 billion between April and June of this year, to a total of $11.38 trillion, according to the latest Quarterly Report on Household Debt and Credit issued by the Federal Reserve Bank of New York. Now, the total value of outstanding loan balances of all types is down $1.3 trillion from the all-time high observed in the third quarter in 2008.

These changes come largely as consumers have been able to continue making payments into their various outstanding obligations, on time and in full. During this past quarter, instances of late payments continued to drop, the report said.

Delinquency rates on the decline for most types of credit
Overall, about 9 percent of all outstanding debt was in delinquency of some kind, but that was down from 9.3 percent observed at the end of the first quarter of the year, the report said. In all, about $1.02 trillion in balances are outstanding, of which $765 billion is 90 days or more behind on payments.

Mortgage delinquency slipped to 6.3 percent from 6.7 percent, and auto loans fell to 4.2 percent from 4.6 percent, the report said. Credit card balance delinquency stood at 10.9 percent, down from 11.3 percent, but that was still the lowest level observed since the end of the fourth quarter in 2008.

"The continuing decrease in delinquency rates suggests that consumers are managing their debts better," said Wilbert van Der Klaauw, vice president and economist at the New York Fed. "As they continue to pay down debt and take advantage of low interest rates, Americans are moving forward with rebalancing their household finances."

However, student loan balances continued to be troublesome for many borrowers, as its delinquency rate ticked upward to 8.9 percent, though the Fed estimates that this number may actually understate late payments on these lines of credit, as about half are in deferment at any given time, and thus not counted as part of this total. Further, consumers continued to borrow on student loans, with balances on them rising $10 billion during the quarter to $914 billion.

Continuing changes in credit card borrowing
Since the end of the recession, perhaps no single kind of credit has undergone the kinds of changes as those observed for credit card borrowing. Consumers have made efforts to drastically cut their reliance on these cards, which tend to carry higher interest rates than other types of credit, and that was reflected in the second quarter.

In all, outstanding credit card balances fell to just $672 billion, the lowest level since the second quarter in 2002, and 22.4 percent lower than the all-time high observed in the fourth quarter of 2008, the report said. Further, a very small portion of the total amount of debt that slipped into early-stage delinquency during the second quarter was on credit cards.

Less demand for new credit?
Meanwhile, even as consumers continued to cut the amount of debt they carried and made more payments on time, many people across the country also became less interested in obtaining new types of financing, perhaps as a result of negative feelings about their personal finances, the report said. The number of credit inquiries within the last six months, which the Fed considers to be an indicator of demand for new credit, declined 2 percent from the first quarter. This is true even as the average credit score in the U.S. rose very slightly once again, to nearly 700.

This change may show that Americans are simply being more cautious in their approach to borrowing in general, even as many lenders continue to broaden their qualification minimums for many types of consumer credit, most notably credit cards. A more cautious approach to borrowing may help more consumers steer clear of delinquency and default in the future, but could be troublesome for the economic recovery as well, particularly if they plan to cut back on spending.

When you want to make sure your finances are in order, you should check not only your monthly bank statements and bills for credit cards and loans, but also order copies of your credit reports. This will help you to identify any potentially unfair markings that could be taking a chunk out of your overall credit rating. If you discover such an entry, you should take the opportunity to contact a credit repair service and work with them to correct the issue.

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