40533025 - a picture of a group of happy friends shopping in the city

40533025 – a picture of a group of happy friends shopping in the city

Recent data showed that household debt is on the rise. In fact, according to the New York Fed’s latest quarterly report on household debt, total household debt saw an increase of $35 billion to over $12 trillion.

The driver of debt

While household necessities such as food, utilities, clothing and more are certainly not getting any less expensive, the growth in total household debt was fueled by two primary areas: credit cards and car loans.

Auto loans have been on the rise in recent years as the economy has bounced back from the financial crises of 2008 and 2009. While an increase in the amount of auto loans comes as no surprise, the rising amount of credit card debt is bucking the trend seen in recent years and could be a source of concern.

In fact, following the financial crises of 2008, households cut back significantly on credit card spending and maintained lower spending rates until 2014. Since then, however, card holders seem much more comfortable pulling their plastic, and credit card debt has increased by tens of billions of dollars.

Deleveraging

From the year 2008 to 2013, total household debts declined by an astounding $1.5 trillion dollars. This is a primary example of deleveraging at work. As the financial crises took hold, households became more and more reluctant to use credit. Since that time, however, the credit cycle has kept its wheels turning, and households are beginning to once again use more credit. The credit cycle has not come full circle, however, as current debt levels are reportedly $400 billion below their 2008 highs.

Once the deleveraging began in 2008, not only did credit use go down but extensions of credit also declined as banks and lenders looked to shore up their balance sheets. Those with lower credit scores were hit particularly hard as banks went into “risk-off” mode. In fact, according to a New York Fed supplemental report on credit cards, the number of people with low credit scores having a credit card declined by 10 percent.

Credit cards are seeing a resurgence among subprime borrowers. The number of people with credit scores below 620 having a credit card has seen almost a five percent increase in the last couple of years. The number of people with scores in the 620-660 range having a credit card has risen by about 4.5 percent in recent years.

To put this into context, the amount of people with credit scores from 620-660 stands at approximately 58.8 percent. The amount of people with scores below 620 stands at approximately 50 percent. These numbers may be considered significant, since about 88 percent of people with high credit scores are credit card holders.

The good and bad

While credit cards may be a useful tool and may be convenient, they are also fraught with danger. If not used responsibly, credit cards can quickly lead to overspending, high interest costs and even inability to pay. Credit card delinquencies have continued to improve, even as credit has become more widely available once again.

Credit card delinquencies are not the only type of dent to see improvements in recent years. Mortgage delinquencies have also declined and the number of foreclosures has reportedly declined to levels not seen in many years.

Student loans are bucking the trend a bit, as about 11 percent of these loans are in delinquency. As credit card and auto loan debt continue to climb, student loan debt may also see further increases.