Consumer Debt Deep Dive

Consumer debt is the most common form of debt and consists of debts that are owed as a result of purchases a good or service. This debt is money borrowed that must be paid back at some predetermined date (Keown, Martin, & Petty, 2017). These lines of credit could have different interest rates or payback terms. Such consumer debt could be in the form of credit card debt, payday loans, auto loans, medical debts, or student loan debts. This post will examine consumer debt in The United States.

History of Consumer Debt

In 1967, The First National City Bank of New Year, now known today as Citigroup, introduced the Everything CardThis leading bank at the time played a major role in introducing consumer financial in the United States. The goal of the bank was to make it easy and increase business by allowing consumers to buy a variety of everyday items on credit (Zumello, 2011).

Scholars argue that the American people to accept debt after World War II. First originating as practices with loan sharks to evolving into credit which we know today as the bank credit card (Zumello). In the 1950s and 1960s, the bank credit card as a means of providing credit for any type of purchases, unlike the previous card which was limited to certain stores, diners, or hotels. Consumption habits increased as items that were once luxuries now became necessities to everyday Americans and this expanded with the growth of credit. From 1956 to 1967 consumer debt increased by 133% which was 42.5 billion to 99.1 billion during this time (Zumello, 2011). As credit was marketed as normality it was widely accepted by everyday consumers. Consumer credit during this time was starting to be used as a tool rather than as an emergency because of a lack of funds.

In 1967, The First National City Band started a marketing campaign for their Everything Card. This showed a happy upper-class family who was well dressed, holding gifts, shopping bags, and his and hers Everything Cards (Zumello). The purpose of these campaigns was to get consumers to enroll in their Everything Card as well as get more merchants to start accepting the cards. This was when credit cards in The United States became a normal way of making purchases for consumers. Even though the Everything Card later failed it pioneered a way for consumers to purchase almost any item using a line of credit. Visa and Mastercard were soon to follow with their forms of “Everything Cards”.

As time progressed after the 1950’s we saw more and more merchants accepting credit cards. Gas companies issued their cards but they weren’t accepted at competitors, and hotels issued their cards. Then when technology improved we saw general-purpose credit cards which we know today that were available to use in almost any situation. Now, you can use your credit cards around the world, and even though the merchant doesn’t know you or your financial situation, if the card issuer approves you then you are good to use the credit card for that purchase. Today we see credit cards in almost every normal American wallet. It has become a status symbol and is one of the most marketed items to consumers. Computerized records are kept of your credit purchasing history and bill-paying habits this determines the rates at which the consumer can utilize credit in the future.

How Consumer Debt Works

Consumer debt is held by an individual and can come in many forms. These debts are obligations to pay back borrowed money in a specific time frame and duration. This individual uses a line of credit to purchase goods or services. These types of consumer debt can come in the form of revolving debt such as credit cards or non-revolving such as student loans at a fixed rate (Keown, Martin, & Petty, 2017). Consumer debt contributes to economic growth in The United States as long as the economy continues to grow and consumers pay off their debt faster in the future (Amadeo, 2018). For example, if you took out student loans for a degree it will give you upward income potential in the future. Then that debt allowed you to make a larger economic impact on the economy with your consumer spending as you make more.

Credit scores known as Fair Isaac Corporation (FICO) scores are an integral component of the consumer debt landscape. FICO continually updates their algorithms to change with consumer behavior (Hynh, 2013). This score is based strictly on how the consumer interacts with debt. Such as opening new lines of credit, paying credit balances on time, different types of credit, etc. Having a better FICO score allows the consumer to get better interest rates or loans for their future purchases. FICO continually updates their scorecard weights based on changes in the economy such as after the mortgage crisis raised interest, the FICO score updated their algorithms for events relating to mortgage stress. Antagonists argue that the FICO score is not a true indicator of the person’s ability to pay their consumer debt since the score is only based on how the individual interacts with debt. If such a person had a 0 or undeterminable credit score they might not be able to rent an apartment at a complex which checks for a credits score. This same person could have a net worth in the deca-millions and be able to write a check to buy the complex, but not rent an apartment there.

Current Levels of Consumer Debt

           The United States today has not changed since the financial crisis of 2008. In June of 2017, the outstanding revolving debt rose to 1.02 trillion dollars which surpassed the previous peak which was right before 2008 (Federal Reserve System, 2017). The data also shows that missed debt payments have declined since 2008, but defaults on credit cards and auto loans are on the rise. The average household in the United States has a credit card balance of $15,654 and a household’s overall consumer debt averages to $131,431 which includes mortgages (Issa, 2017). The study showed changes in types of debts over previous years with Americans putting medical expenses on credit cards and the average household is paying hundreds in credit card interest each year. While fewer than 18% of households pay off their credit card balance in full each month (Issa, 2017). This shows that consumer debt is common in the majority of households in The United States and would be considered normal.

Disadvantages to Consumer Debt

            When challenges arise, debt can be devastating to a person’s success. If the economy goes into a recession or downturn, you could lose your job in which your loans may go into collections because you can’t pay them. This could ruin your FICO score which would add more challenges to your future consumer debt purchases. With the FICO score tarnished with bad credit then this will result in loans not being issued or high-interest rates which could further decrease one’s ability to build wealth. If the individual were to fall too far behind on their payments, they could be forced into bankruptcy. If consumers take on too much debt and lessen their spending abilities this can hurt the economic growth of The United States (Discover, 2017). If an individual has too much of their monthly cash flow going to interest charges this reduces their ability to make new purchases.

Psychological Effects

           There can be psychological aspects to personal finances in which the level of consumer debt a person has can directly impact their daily life. 10,900 households were surveyed across The United States and the data showed that over-indebtedness is strongly associated with depressive symptoms. The study found that as the debt of a household decreased over time that the household had relief of some of the depressive symptoms (Hojman, Miranda, & Ruiz-Tagie, 2016). The survey results that were discussed in the article show that stress and chronic pain were higher when the household had a large burden of consumer debt. Reducing the financial burden of debt showed to have similar relief of anxiety and depression. As consumer debt in The United States continues to rise households need to be aware of the effects that taking on more liabilities could have on their overall well-being.

           If a household chooses to pay off their consumer debt to minimize risk, maximize cash flow, and decrease the liabilities on their balance sheets then there are psychological factors that can affect the level at which the person succeeds. A study examined consumers paying off their debt in the form of debt elimination goals that ranged from an overall goal of all debt compared to breaking the overall debt into sub-goals. The study showed that when consumers broke down their existing debt into each specific debt rather than overall debt then they saw more progress due to the “quick wins” paying off each loan. Breaking the overall debt into each debt as a task helped consumers directly address the debt and pay it off faster. The study shows that paying off debt has a psychological aspect to it when consumer works on debt management.

           Unlike mortgage debt or automobile loans, consumer debt often refers to revolving debt which means the consumer can spend until they reach their credit line limit. This can lead to large balances at high-interest rates. Typically, with this revolving consumer debt, there are little assets to show with the credit balance, unlike a mortgage. A national study on families and households in The United States showed there is an indirect and direct association between marital conflict with higher levels of consumer debt. The study showed that newlywed couples who assumed more consumer debt became less happy in their marriage and brought on marital difficulties compared to couples that paid down consumer debt (Dew, 2011). Another study performed on marriages showed that couples with successful long-term marriages avoided debt. Consumer debt can cause strain on a relationship, it can also lead to divorce. For every single unit of increase in consumer debt, there was a 7-8% increase in the likelihood of that marriage to lead to divorce (Dew, 2011). The association with families and the amount of debt they had seemed to correlate to the amount of conflict they had in their marriage leading to issues within the couple’s relationship. These studies show that debt can influence one’s marriage and cause unneeded tension due to relational strain over money. 

Conclusion

            Understanding how consumer debt will impact an individual’s life is critical for building wealth. Consumers can use debt for the majority of purchases in the economy, so it is up to the individual to manage their level of risk at which they are comfortable with consumer debt. In this paper, we discussed the history of credit cards, levels of current consumer debt, impacts on the economy and individuals, and the psychological effects of having debt. After reviewing scholarly articles on the topic of consumer debt in the United States I found more topics with negative aspects of consumer debt and the problems that can arise rather than benefits. The studies showed that consumer debt can lead to tension in marriages, divorce, stress, and chronic pain with the burden of carrying consumer debt. With consumer debt rising and in the trillions of dollars in The United States consumers need to be strategic on how they use debt in their finance. Consumer debt is a large part of The United States economy and can lead it to future growth or a recession based on how individuals interact with debt.

How have you seen consumer debt negatively effect someone you care about and what are you doing differently? Leave your comments below!

References

Amadeo, K. (2018). 3 Reasons Why Americans Are in So Much Debt. Retrieved March 06, 2018, from https://www.thebalance.com/consumer-debt-statistics-causes-and-impact-3305704

Dellande, Gilly, & Graham. (2016). Managing consumer debt: Culture, compliance, and completion. Journal of Business Research, 69(7), 2594-2602.

Dew, J. (2011). The Association Between Consumer Debt and the Likelihood of Divorce. Journal of Family and Economic Issues, 32(4), 554-565.

Gal, D., & Mcshane, Blakely B. (2012). Can small victories help win the war? evidence from consumer debt management. Journal of Marketing Research : JMR, 49(4), 487-501.

Hojman, D., Miranda, &., & Ruiz-Tagle, J. (2016). Debt trajectories and mental health. Social Science & Medicine, 167, 54.

How Does Credit Card Debt Affect the Economy (2018). Retrieved March 06, 2018, from https://www.discover.com/credit-cards/resources/how-does-credit-card-debt-affect-the-economy

Huynh, Frederic. (2013). Adapting credit scores to evolving consumer behavior and data. Suffolk University Law Review, 46(3), 829.

Skogrand, L., Johnson, A. C., Horrocks, A. M., & DeFrain, J. (2010). Financial management practices of couples with great marriages. Journal of Family and Economic Issues, 32, 27–35.

Zumello, C. (2011). The “everything card” and consumer credit in the United States in the 1960s. Business History Review,85(3), 551-575.

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