Consumer debt
Consumer debt refers to the money borrowed by individuals to purchase goods and services that typically do not appreciate in value, distinguishing it from household debt, which encompasses all debts a household incurs, including mortgages and auto loans. In the context of the U.S. economy, consumer debt is significant as it reflects societal trends in consumption, especially following the economic shifts post-1980s. The rise in consumer debt has been linked to a growing societal acceptance of credit, shaped by various demographic factors and a lack of financial literacy, contrasting sharply with attitudes from previous generations who experienced the economic hardship of the Great Depression.
The Great Recession from 2007 to 2009 impacted consumer debt, leading to a peak in 2008 followed by a decline, yet debt levels began to rise again in subsequent years. As of 2014, U.S. households carried over $11 trillion in debt, with notable delinquency rates across various types of loans. A culture of debt has emerged, where individuals often carry multiple forms of debt, complicating their financial situations. Effective management strategies, like gradual debt repayment plans, can motivate individuals to reduce their debt burdens, though many resort to bankruptcy or debt counseling. Regulatory efforts, such as the Fair Debt Collection Practices Act and the establishment of the Consumer Financial Protection Bureau, aim to protect consumers from predatory lending practices and improve the overall landscape of consumer debt management.
On this Page
Subject Terms
Consumer debt
Consumer debt, which is an economic term used to describe debts amassed as a result of the consumption of goods that do not appreciate in value, is often confused with household debt and credit-card debt. Household debt describes the total debts amassed by a household, including mortgage loans, auto loans, student loans, and other loans, and actually encompasses individual consumer debt, while credit-card debt is merely a function of consumer debt.
Consumer debt plays an integral role in the functioning of the economy in the United States, particularly as the US economy is primarily based on consumption and has been since at least the 1980s, if not before. Consumer debt rose and fell in the United States during the Great Recession of 2007–9 before beginning to rise again in 2010. It remained high as of 2014.
Background
In the 1970s and 1980s, consumer-debt research into societal patterns and demographics of consumers reported signs of a growing trend that remains evident decades later: an increasing societal acceptance of credit and subsequent debt, primarily as a direct result of a lack of financial acumen. This shift was unlike that of previous generations, such as the post–Great Depression generation, which demonstrated more positive financial behaviors as a direct result of lessons learned from the economic collapse.
The gradual diminishment of the old attitudes and stigmas attached to credit and carrying debt continued well into the twenty-first century. This was particularly evident among the middle class in the United States, which struggled with increasing social norms of abundant consumption and a sense of achievement (for example, purchasing larger homes despite smaller family sizes), as well as among lower-income earners, such as students, ethnic minorities, and the elderly population.
In the early 1950s, Franco Modigliani and Richard Brumberg developed a concept known as the “life-cycle hypothesis” to describe the behavior of individuals who tend to borrow more early in life in order to smooth consumption across the life cycle. Specifically, one incurs debt for education, such as student loans or training, in an effort to increase earning potential, and thus consumption, later on. In addition to borrowing early for education, American consumers also seek additional forms of credit, such as credit cards, in an effort to increase consumption in the short term, which in turn increases debt load. Such a pattern among a growing segment of the population then creates a culture of debt. “Culture of debt” is the phrase used to describe a society where people have developed a sense of entitlement and thus view the otherwise undesirable accumulation of consumer debt as a necessary step on the path to achieving desired commodities.
Topic Today
In the United States the Great Recession lasted from 2007 to 2009. Data from the US Federal Reserve shows that US consumer debt peaked in 2008 and then declined. After a brief period of decline from 2009 to 2010, however, consumer debt in the United States once again increased. Specifically, according to the Federal Reserve, total US household debt for 2013—including mortgages, student loans, motor-vehicle loans, and credit-card debt or revolving credit—was $11.28 trillion, up nearly 3.7 percent from the previous year. Debt delinquency rates of ninety days or more were reportedly 3.4 percent for auto loans, 3.5 percent for home-equity lines of credit, 4.3 percent for mortgages, 9.4 percent for credit-card debt, and 11.8 percent for student loans. In May 2014 household credit on bank credit cards grew 2.1 percent—the highest growth rate since 2008, when the household credit on bank credit cards was at its highest. While increasing credit consumption and balance carrying was symptomatic of a renewed sense of economic progress among consumers as well as a reflection of the loosening of credit standards since the recession, it was also indicative of consumer attitudes toward consumption and credit.
According to a 2013 article by Lukas R. Dean et al. in the Journal of Financial Service Professionals, positive financial behavior has become synonymous with more educated, higher-income individuals, who typically compare prices before buying big-ticket items and pay their credit-card bills in full at the end of each month. These individuals also tend to possess more positive attitudes toward money, thereby increasing their chances to make more thoughtful financial decisions. Research has shown that individuals who carry credit-card debt from month to month also typically incur additional forms of consumer debt, including automobile debt, installment debt, and personal-loan debt. As a result, a cycle of indebtedness is created that can present overwhelming obstacles to achieving greater financial well-being for those with little to no financial acumen.
With regard to consumer-debt management, a gradual payment plan has proven more advantageous to indebted consumers when paying off debt. In other words, paying off small consumer debts, regardless of applicable interest rates, proves to be more motivational than alternative methods, such as paying off the largest balance or the debt with the highest interest rate first. These findings are consistent with previous psychological studies examining goal pursuit. This behavior pattern, which became popular between 2009 and 2010, was more reflective of individuals with more positive financial behavior.
However, evidence tends to support the notion that many consumers have chosen other methods for dealing with indebtedness, rather than tackling the debt by a gradual payment plan. Such methods include filing for bankruptcy, seeking consumer credit counseling or debt-management services, or simply defaulting on the debts, which was particularly common in the aftermath of the Great Recession with respect to mortgage loans. This was not initially the case; when the recession first struck, homeowners prioritized their payments of consumer debts by paying their mortgages first. As the recession continued, however, prompting increasingly reduced wages and a drop in long-term employment, the homeowners began to default on these payments due to diminished liquidity, even if they previously had been more financially prudent regarding consumption.
The Fair Debt Collection Practices Act (FDCPA) of 1977 was designed to protect consumers by establishing a civil liability against creditors who practice predatory debt-collection tactics. Unfortunately, as a result of state and federal roadblocks that perpetuate predatory tactics, millions of indebted consumers are still met with significant financial harm, either directly (e.g., judgments) or indirectly (e.g., lowered credit scores on credit reports). In 2011 the Consumer Financial Protection Bureau (CFPB) was instituted to help reform the consumer-debt-collection industry in the United States by examining the practices of banks and other lenders. As of 2014, the US economy continued to slowly improve, though consumer debt persisted and defaults remained high.
Bibliography
Amar, Moty, et al. “Winning the Battle but Losing the War: The Psychology of Debt Management.” Spec. issue of Journal of Marketing Research 48.SPL (2011): S38–50. Print.
Andersson, Fredrik, et al. “The Changing Pecking Order of Consumer Defaults.” Journal of Money, Credit and Banking 45.2–3 (2013): 251–75. Print.
Dean, Lukas R., et al. “Debt Begets Debt: Examining Negative Credit Card Behaviors and Other Forms of Consumer Debt.” Journal of Financial Service Professionals 67.2 (2013): 72–84. Print.
Finley, John. T. “Consumer (Bankcard) Debt and Regulation: Are Things Working?” Academy of Banking Studies Journal 12.1–2 (2013): 47–60. Print.
Gal, David, and Blakeley B. McShane. “Can Small Victories Help Win the War? Evidence from Consumer Debt Management.” Journal of Marketing Research 49.4 (2012): 487–501. Print.
“Improving Relief from Abusive Debt Collection Practices.” Harvard Law Review 127.5 (2014): 1447–68. Print.
Miller, Richard K., and Kelli Washington. Consumer Behavior 2014. 10th ed. Loganville: Miller, 2014. eBook Collection. Web. 26 July 2014.
Modigliani, Franco. “Life Cycle, Individual Thrift, and the Wealth of Nations.” American Economic Review 76.3 (1986): 297–313. Print.
Peñaloza, Lisa, and Michelle Barnhart. “Living U.S. Capitalism: The Normalization of Credit/Debt.” Journal of Consumer Research 38.4 (2011): 743–62. Print.
Smeeding, Timothy. Income, Wealth, and Debt and the Great Recession. Stanford: Stanford Center on Poverty and Inequality, 2012. Recession Trends. Web. 21 Aug. 2014.
Wack, Kevin. “Consumers Finally Start Ramping Up Card Debt Again.” American Banker 27 June 2014: 2.Business Source Complete. Web. 21 Aug. 2014.
Wilcox, Keith, Block, Lauren G. and Eisenstein, Eric M. “Leave Home Without It? The Effects of Credit Card Debt and Available Credit on Spending.” Spec. issue of Journal of Marketing Research 48.SPL (2011): S78–90. Print.