Is There a Personal Debt Crisis on the Horizon?

Credit CardIs There a Personal Debt Crisis on the Horizon?

Typically, when you get real burned you change your ways. It looked that way during the financial crisis of 07 to 09. Consumers had binged on credit for so long and it finally caught up with them. As a result, you would think that consumers would work harder to get rid of whatever debt that they had and vow never to get into it again. Well, I believe that the answer is yes and no. Yes, they wished that they were out of debt but they can’t because of the wrong type of dependency.

Consider these statistics provided by www.wallethub.com:

“U.S. consumers racked up $34.4 billion in credit card debt during the second quarter of 2016, which is the largest second-quarter accumulation since at least 1986, according to the personal-finance website WalletHub’s 2016 Credit Card Debt Study, released today. This development lends credence to the notion that we are flirting with financial disaster, coming on the heels of last year’s record increase in credit card debt ($71B) and last quarter’s record-low first-quarter pay-down ($27.5B).

Furthermore, we are now on track to surpass $1 trillion in outstanding balances for the first time by the end of 2016.”

There are three important points to make.  First, we are on track to surpass the old record of debt that was set before the financial crisis and eclipse over 1 trillion dollars in debt.   Second, there was the largest increase in debt during the second quarter in 30 years.  Finally, consumers do pay debt down.  However, that didn’t happen in the second quarter with the lowest “pay-down” of debt in history during a second quarter.

It gets more disturbing.

Experian put out this statistic concerning sub-prime debt.  Sub-prime debt is credit extended to low credit score consumers with interest rates in the middle to upper 20% range. It is next to payday loans as far as horrible credit to take out.

“The first six months of 2016 has shown that the total credit card limits among the subprime and deep subprime credit range totaled $6.4 billion, the highest amount reported for those groups in the last five years.”

Now let me sum it up.  We are setting records in consumer debt with a good percentage of that debt being high interest rate debt.

The subprime debt market is exploding.  There is a ton of cash waiting to be lent out if you are willing to accept high interest rates.  It is all driven by investors investing money into the sub-prime debt market.  If the need is there, consumers with all types of credit can easily get money.  Do you really think that consumers are borrowing money at high interest rates to buy flat screen TV’s?  No, I think that the financial crisis took care of that temptation.

Is consumer spending increasing at the same rate as debt balances.  No, not even close.  There is only one conclusion that we can come to.  The consumer is having to resort to credit to pay for living expenses.  With a never ending flow of credit available, this robbing Peter to pay Paul works until the money dries up.  The money should start to dry up once the delinquencies start to increase.

Bottom line is that the consumer is far from healthy and these statistics point to a bad ending.  Don’t forget that consumer spending is responsible for 2/3rds of economic growth.  That points to the fact that economic growth has been so anemic.  All of the signs are there for debt crisis 2.0.

As I always have said – debt is not a problem until it is a problem then it comes an overnight financial nightmare!

Bob Brooks is host of the Prudent Money Radio show. Bob is also a financial advisor who helps people set and achieve financial goals. For more information or to set up a phone consultation, email Judy Parrish at judy@prudentmoney.com .

  • Faye

    Just a thought…maybe we need to lower our living expenses? I understand that the cost of living has increased I am feeling it with my increased health insurance premiums..and due to that I have had to adjust my budget accordingly…but everything has to balance…so my entertainment budget has decreased accordingly.

    • Bob Brooks

      Faye

      Yes, the health insurance premiums are creating a problem. It seems that they are the only thing in this economy going up in price!

      Bob

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