Household debt is growing again, according to data collected by The Federal Reserve Bank of New York. As of the end of the first quarter of 2017, household debt stood at $12.73 trillion, up from $12.57 trillion at the end of 2016 and $12.12 trillion at the end of 2015.
To those in the financial sector, growing household debt is an encouraging indicator. It signals that consumers are once again confident in their ability to make purchases and pay back loans. It also speaks to an increasing number of consumers who have repaired their credit enough to qualify for loans.
Consumer spending comprises 70 percent of total economic activity, Steven Rick, CUNA Mutual Group's chief economist, explained to Credit Union Times. This means that, the more - and more often - consumers are willing to spend, the better off the economy will remain, as long as that spending is responsibly done.
Credit card debt trends
Credit card debt is one area of particular interest, Credit Union Magazine writer Glen Sarvady commented. Though revolving balances were still notably lower than their 2008 high of $870 billion, credit card use is steadily increasing at between 7 and 8 percent per year. This means consumers are using their cards more, though carrying a balance from month to month less.
Why this is good
Increasing credit card use in tandem with relatively low revolving card debt shows a growing trend toward responsible credit card use. That is, it seems consumers are only spending what they can afford and avoiding interest payments.
Why this is bad
On the other hand, fewer interest payments means a shrinking revenue stream for credit unions. Additionally, some may view increased reliance on credit cards as a preliminary sign of future defaults, The New York Times reported.
Auto loan trends
Car loans are significantly increasing, and in the first quarter of 2017 reached their highest point recorded by the Federal Reserve Bank of New York, at $1.17 trillion, according to the Federal Reserve Bank of New York. Credit unions have been enjoying a larger share of auto loans in recent years, as banks cut back on this consumer product.
Between June 2016 and June 2017, new car loans grew 19.9 percent to $126.7 billion, while used car loans grew 13.5 percent to $195.1 billion, according to Credit Union Times.
Why this is good
With credit unions becoming the go-to establishments for an auto loan, these financial institutions may experience higher revenue and greater member growth. This is a channel to capitalize on, and many credit unions already are. Several credit unions have tripled their auto loan originations over the past five years, Credit Union Times reported, and many are enjoying the benefits of this.
Why this is bad
Auto sales, on the whole, are on a downward slope, Sarvady pointed out in Credit Union Magazine. This could cut into credit unions' bottom lines, particularly if their auto loan segments have been a significant factor in growth. If this is the case, it's important that credit unions market their other services to members who were initially brought in by affordable auto loans.
On an economic plane, this could be another indication of consumers beginning to spend outside their means, The New York Times noted. Obtaining an auto loan is common when making a car purchase, and originating these loans for consumers is an important part of any credit union's business strategy. However, irresponsible borrowing on the part of consumers is, in the end, a bad move for both borrower and creditor.
Housing debt trends
Housing-related debt is always going to comprise the majority share of consumer debt. As it stood at the end of the first quarter of 2017, it was 2.5 times the size of nonhousing debt, totaling $9.09 trillion. That said, these levels continue to be below the peaks seen in 2008 when it was $9.9 trillion.
Mortgage debt grew to $8.63 trillion, an increase of $147 billion compared to the final quarter of 2016. Meanwhile, Home Equity Lines of Credit declined $17 billion to $456 billion.
Why this is good
The Great Recession in the late 2000s was largely a result of poor home lending practices. HELOCs were issued and used irresponsibly, and borrowers took out mortgages they ultimately couldn't afford. This meant many borrowers lost their homes and destroyed their credit.
The good news is that lower levels of housing debt could be a sign of more responsible lending and borrowing. Credit Union Magazine reported that the majority of home loans are now granted to borrowers with strong credit - or, in other words - to people who will be able to afford the loan payments.
Why this is bad
Where some people simply aren't in a place to afford a home, those that are may be wary of entering the real estate market after seeing the damaging effects of the housing crisis. It's easy to assume that the majority of the decline in home loans is a result of low-credit or low-income borrowers not taking out these loans. However, there's also the possibility that a significant amount of the decrease is due to qualified consumers simply opting out of homeownership for fear of a 2008 repeat. If this is the case, credit unions and other lenders may need to educate borrowers about responsible mortgage practices and the benefits of homeownership.
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