For the second straight quarter, the percentage of Americans with at least one account in the third party debt collection system hit an all-time high in the first three months of 2013. Close to 15 percent of consumers have an account being worked by debt collectors.

The Federal Reserve Bank of New York (FRBNY) Tuesday published its Quarterly Report on Household Debt and Credit for the First Quarter of 2013. The FRBNY noted that 14.64 percent of Americans had at least one account on their credit reports furnished by third party debt collection agencies, and all-time high. The figure was up slightly from the fourth quarter of 2012,which set a then-record 14.63 percent.

The average balance of those accounts in collection, however, is dropping rapidly. In the first quarter, the average balance of accounts in collection was $1,433, down from $1,499 in the previous quarter and well below the peak average of $1,550 in the second quarter of 2012.

The Quarterly Report on Household Debt and Credit is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative random sample drawn from Equifax credit report data. In the notes for the report, the FRBNY says that “only a small proportion of collections are related to credit accounts with the majority of collection actions being associated with medical bills and utility bills.”

In Q1 2013 total household indebtedness fell to $11.23 trillion, one percent lower than the previous quarter and considerably below the peak of $12.68 trillion in Q3 2008.

Delinquency rates improved across the board: mortgages (5.4 percent from 5.6 percent), HELOC (3.2 percent from 3.5 percent), auto loans (3.9 percent from 4.0 percent), credit cards (10.2 percent from 10.6 percent) and student loans(11.2 percent from 11.7 percent).  The overall 90+ day delinquency rate dropped from 6.3 percent to 6.0 percent this quarter, below the 8.7 percent peak from three years ago.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Other highlights from the report include:

• Outstanding student loan debt increased $20 billion to $986 billion.
• Total mortgage debt decreased to $7.93 trillion from $8.03 trillion.
• Auto loans increased $11 billion to $794 billion.
• Credit card balances decreased $19 billion to $660 billion.
• HELOC balances fell $11 billion to $552 billion.
• Mortgage originations rose for the sixth consecutive quarter, to $577 billion.
• 184,000 individuals had new foreclosure notations added to their credit reports, down 12.5 percent from the previous quarter, the fourth consecutive quarterly decline.

Patrick Lunsford 

Americans cut back on using their credit cards in March, suggesting many were reluctant to take on high-interest debt to make purchases.

Consumer borrowing rose just $8 billion in March from February to a seasonally adjusted $2.81 trillion, the Federal Reserve said Tuesday. It was the smallest increase in eight months.

The gain was driven entirely by more loans to attend school and buy cars. The category that measures those loans increased $9.7 billion to $19.6 trillion.

A measure of credit card debt fell $1.7 billion to $846 billion. That’s 17.2% below the peak of $1.022 trillion set in July 2008.

Since the recession, consumers have been more cautious about using credit cards. Economists believe consumers will stay cautious this year, in part because of an increase in Social Security taxes that has reduced tax-home pay for most Americans.

Cooper Howes, an economist at Barclays, said consumers have been trying to get better control of their debts since the recession hit and he predicted this trend will continue.

While the Fed does not release a breakdown between auto and student loans, Howes said his analysis of the Fed data indicates that almost 80% of the March increase reflected student loans. That would continue a pattern seen in recent years: Americans who lost jobs or recent graduates who can’t find work have returned to school and are taking out loans to pay for their education.

According to quarterly data compiled by the Federal Reserve Bank of New York, student loan debt has been the biggest driver of borrowing since the recession ended in June 2009. Student loans reached $966 billion in last year’s fourth quarter. That’s up from $675 billion in the second quarter of 2009, when the Great Recession was ending.

Consumers increased their spending from January through March at the fastest pace in more than two years. However, they had to trim the pace of their savings to finance the faster spending. Their after-tax income dropped by the largest amount since the final three months of the recession in 2009. Part of the drop in after-tax income reflected the increase in Social Security taxes that took effect on Jan. 1.

A person earning $50,000 a year will have about $1,000 less to spend this year. A household with two highly paid workers will have up to $4,500 less.

Solid hiring could offset some of the drag from the tax increase. The economy added 165,000 jobs in April and hiring in the two previous months was better than previously reported. That helped drive the unemployment rate down to a four-year low of 7.5 percent in April.

The Federal Reserve’s borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

USA Today

A new study which was released Wednesday by the Consumer Financial Protection Bureau compared payday loans to a carousel, or, in the organization’s words, a “revolving door” of debt, as this short-term loan type continues to court controversy.

The CFPB did not divulge any exact plans going forward prior to releasing the results of the study, but it did hint that it plans to be more hands-on in trying to curtail the contentious practice of financial institutions offering payday loans to consumers. According to the CFPB, even if costs related to payday loans are passed off as fees, these costs do, in fact, compare to an annual percentage rate as high as 300 to 400 percent.

At the same time the CFPB tentatively presented the results of its study, speculation arose regarding a possible crackdown by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation on payday loans and other deposit-advance products being offered by banks.

“For too many consumers, payday and deposit advance loans are debt traps, and the stress of having to return every two weeks to re-borrow the same dollars after paying exorbitant fees and interest charges becomes a yoke on a consumer’s financial freedom,” postulated the CFPB’s Richard Cordray.

He observed patterns of “high sustained use”, regardless of whether the consumer rolls the loan over or pays the loan off, then turns around and takes on another payday loan or deposit-advance loan. The CFPB’s findings show that the median payday borrower took out a total of 10 loans in one year and paid a total of $458 worth in fees.

The figures were more dismaying for deposit-advance loans, where Cordray noted that “more than half (of the borrowers) took advances totaling $3,000 or more,” and among this group, over half of them had paid off one loan, only to return to take out another within just twelve days’ time.

Elizabeth Atkins

Canadians continued a years-long national borrowing spree through the first three months of 2013, a new report shows, but signs are emerging that the credit party is coming to an end.

Total consumer debt excluding mortgages ticked 3.9 per cent higher in the first quarter, according to fresh figures released by Equifax. Canadians collectively owe $500.8 billion, up from $497 billion in debt held by households at the same time last year.

“Balances are increasing for bank installment loans, lines of credit and auto loans,” said Cristian deRitis, senior director of consumer credit economics at Moody’s, an agency that monitors debt held by companies, governments and households.

The rise breaks with a deceleration in loan growth that began in 2011, deRitis said.

Big lenders such as the country’s banks as well as policymakers have been calling for consumers to rein in debt levels which have hit record highs. Ultra low interest rates in recent years have fueled demand among consumers to take on credit.

But with consumers collectively now owing more than $1.60 for every after-tax dollar in income, concern is mounting.

Speaking in Washington this week, Mark Carney, the outbound head of the Bank of Canada, said interest rates “could be [moved] higher sooner if this isn’t addressed or this isn’t adjusted in a more timely way.”

The Bank of Canada has kept its key

interest rate at 1 per cent for some time, following the lead of central banks in larger economies that have lowered rates to keep credit flowing in a bid to speed up sluggish economic growth. Lenders rely on the rate to set their own.

The low rates have fueled a real-estate boom in Canada, as well, but that too is coming to an end as banks rein in lending and new rules make borrowing more difficult for homebuyers.

On a brighter note, Canadians were more diligent in making payments on the debts through the first three months of the year. Equifax said the percentage of delinquent accounts, defined as loans that have not seen a payment for 90 days or more, ticked down to 1.19 per cent compared to 1.39 per cent a year ago.

Jamie Sturgeon

The IAPDA has introduced a new calculator especially for debt burdened consumers to use as a comparison tool of all debt relief options.

This new online calculator will allow a consumer to add up his/her current outstanding debt, input that amount into the calculator along with the number of debt accounts are included in the total debt.

The calculator will then calculate the program/plan scenario of each debt relief option based on this amount of debt. The options compared are debt consolidation loans, consumer credit counseling, debt settlement and making only the minimum payments. The calculator compares for each debt relief option, the monthly payment, the number of months required to complete the program, interest rate and total interest paid.

The calculator will also show the consumer the amount they can save each month by choosing the debt relief option best for them.

A description of each debt relief option including bankruptcy is also offered.

This is a very important tool that consumers can use to assess their debt relief options based on their individual and unique total debt level. Every consumer who is exploring their current debt relief options will benefit from this information when exploring which debt relief option will be best for their unique situation. There is no one size fits all debt relief solution and many factors need to be considered by consumers before moving forward.

See the new calculator is action at: http://www.iapda.org/consumeroptionscalculator.php

Policy makers on the Federal Reserve’s interest-rate setting panel have for the first time identified high student debt burdens as a risk to economic growth, adding to a growing chorus of government officials concerned about households’ education borrowings.

At $1.1 trillion, according to the Consumer Financial Protection Bureau, outstanding student loan debt is the largest consumer debt class after home mortgages. Financial regulators, the U.S. Treasury and the New York Fed have all warned about the possible danger student loans pose to financial stability and the broader economy.

But prior to its March meeting, the Federal Open Market Committee, which sets interest rates that affect trillions of dollars of loans and securities, had never before mentioned student loans as a possible downside risk to the economy, according to a review of past meeting minutes.

According to newly released minutes from the March meeting, some members of the panel mentioned “the high level of student debt” as a risk to aggregate household spending over the next three years.

“There is increasing consensus that student loan debt is having a broader impact on the economy than we think,” Rohit Chopra, the CFPB official responsible for the student loan marketplace, said in an interview.

The committee’s mention of student debt burdens is likely to further discussion in Washington over what, if anything, policy makers should do to rein in what has been diagnosed as a growing problem.

Millions of student borrowers are paying record relative interest rates on their government loans, according to a Huffington Post review, frustrating efforts by the Fed to reduce borrowing costs for households and businesses.

The U.S. government’s funding costs to borrow for 10 years, measured by the yields investors demand to purchase the debt, has averaged less than 2 percent since the summer of 2011. But rates on the majority of loans taken out by undergraduates from the Education Department have remained since 2006 fixed by law at 6.8 percent.

The spread between the two, which experts say is an appropriate way to measure relative rates, since student loans are generally repaid in about 10 years, has ranged from 4.5 percentage points to 5.27 percentage points since August 2011 — the highest gap on record.

Unlike with home mortgages, there are few refinancing opportunities for borrowers with student debt, policymakers have said.

The CFPB in February launched a consultation in part to determine how to increase refinancings.

“Like with mortgages, many borrowers with private and federal student loans have been unable to take advantage of today’s historically low interest environment,” the bureau said in an October report. “While these borrowers may not be in financial distress, they may be paying interest rates that are not commensurate with their risk profile.”

Groups including the National Association of Home Builders, American Federation of Teachers, American Medical Association and AARP, the advocacy organization for older Americans, have written to the CFPB to express their concerns over the possible negative impacts of increasing student debt levels.

“Higher student debt loan burdens impair the ability of recent college graduates to qualify for a loan, thereby increasing the time required for such new households to become homeowners,” NAHB said in an April 5 comment letter.

In discussing the effect of rising student loan burdens on homebuyer demand, the group said: “Anecdotal evidence from our members suggests that this issue is a concern and has been increasing in terms of impact.”

Last week, the American Medical Association said it was concerned about the adverse impact of high student debt levels on the medical profession.

“Debt plays a major role in career decisions and impacts the supply of our nation’s physician workforce,” the AMA said. It recommended variable interest rates on medical student loans that are capped at no more than 5 percent.
Shahien Nasiripour

April is National Financial Literacy month and a great time to remind consumers of the importance of taking charge of their personal financial well-being.  Among the important aspects American consumers should know is what to do if contacted by a debt collector about a delinquent or defaulted account.

“While no one really wants to get a call or letter telling them they owe money, consumers need to know they are not alone,” ACA International CEO Pat Morris said. “Each year, for many very legitimate and often unavoidable reasons, millions of consumers fall behind on payments and are contacted by a debt collector.”

ACA International offers helpful tips for consumers to help effectively manage contact from third-party debt collector should the need arise. A third-party debt collector is unique in that they are service provider hired by the owner of the debt (i.e., a creditor or debt buyer) to recover a rightfully owed debt on their behalf.

Know Your Rights. Consumers have important rights under federal and state law, and deserve to be treated respectfully. By law, consumers cannot be harassed, threatened or be subjected to profanity and vulgar language. For more information about consumer rights in debt collection or to ask questions, visit www.askdoctordebt.org.

Communicate.  If you hear from a debt collector, avoiding a letter or call won’t make the debt disappear. The reason for the contact cannot be resolved without the ability to communicate; whether it’s to pay an owed debt, verify an alleged debt or confirm that the debt collector has reached the wrong person.

Identify.  Debt collectors cannot call anonymously nor present themselves as being a representative of a government entity. When contacted, collectors must identify themselves and the name of the collection agency they represent.

Notify the Collection Agency if you Dispute the Validity of the Debt.  By law, the collector must inform you of your right to dispute the debt and provide written verification if you dispute it in writing.  All collection activity stops until this verification is provided.

Seek to Work Out Complaints with the Collection Agency.  Third-party debt collectors sincerely want to work with consumers to resolve complaints.  According to the Council of Better Business Bureaus, in 2012 collection agencies resolved 86 percent of the consumer complaints received.

Protect Your Identity. Do not confirm or provide sensitive personal information (e.g., Social Security number, credit card numbers, and bank accounts) until certain of the authenticity of the debt and the person seeking to collect. Check out whether the collector is a legitimate agency by using the Internet to search the company name or visit www.acainternational.org to see if they are a member. Monitor accounts and immediately report any suspicious or unauthorized purchases to your bank or credit card provider.  Importantly, consumers are entitled to a free credit report each year at www.annualcreditreport.com.  If you believe your identity has been stolen, contact your local police department and visit www.ftc.gov/idtheft for information on what you should do.

ACA International

Debt. You’re drowning in it. Creditors call day and night demanding payments that you simply can’t afford. You’ve decided to move forward with debt settlement, still you’re unsure of the process in choosing a debt settlement company.

Industry changes in 2010 offer new protections to consumers in need of debt settlement. Still, you need to research and think through the selection process before making a decision.

Can you say ‘yes’ to all of these points?

A legitimate and honest debt settlement company will easily meet these stringent criteria:
Company is a member of the consumer credit advocate group, American Fair Credit Council (AFCC), formerly known as The Association of Settlement Companies (TASC)

• Is compliant with the AFCC code of conduct
• Is a member of the International Association of Professional Debt Arbitrators (IAPDA)
• Ensures associates are IAPDA-trained and experienced in debt settlement, debt management, and financial planning
• Will not require or accept up-front payment just to get the process started
• Will not accept money from you, until after a debt settlement plan is successfully negotiated for you, clearly presented to you, and accepted by you
• Will not accept you if you can actually pay off all of your debt
• Has clearly written policies and procedures about their debt-settlement program
• Is a member of the Better Business Bureau and has no less than an A- rating
• Has a resolution and review process for customer disputes
• Has attorneys with significant experience in credit-industry compliance
• Handles client matters—your debt settlement negotiation—in-house
• Offers full disclosure of all debt settlement program fees and costs before the start of a debt settlement program
• Informs its customers, the IRS classifies any forgiven debt above $600 as income that can be taxed
• Requires prospective clients to commit to saving money on their own to fund settlements
• Does not handle or escrow money saved by clients because of the risk of embezzlement and fraud
• Negotiates on an ongoing basis with your creditors and presents all settlement offers to you for your exclusive approval

How did the debt settlement company of your choice measure up to these standards? If you’ve checked every box, then the debt settlement company you are considering will work in your best interest. If not, keep looking until you are satisfied.

Beware of false promises

Watch for these red flags when considering a debt settlement company. If any of these negative marks surface, just say ‘no’:

• Company is not a member of AFCC (formerly TASC)
• Company collects money up front or sets fees based on a percentage of your debt
• Counselors are paid on commission
• There’s no money-back guarantee
• Counselors and employees are not experienced and trained in debt settlement and financial matters

RescueOne Financial

There are lots of resources that say they can help consumers manage or get out of debt. But there are very few that try to help consumers avoid too much debt in the first place.

Many consumers, especially young adults, begin accumulating debt before they really have an understanding of what it is and how it works. Before they know it, they’re having trouble making ends meet.

In short, debt is a financial instrument that allows you to live above your means. You borrow the money to make a purchase that, if you had to pay for it all at once, you couldn’t afford.

A good example is a house. Most consumers can’t come up with $100,000 or more to purchase a home. To buy a home, most people get a mortgage, which is a loan with a term of as long as 30 years.

In most cases, mortgage debt is okay

Even though this is the largest debt most consumers will ever take on, it can be the most benign — although it wasn’t for people who purchased at the height of the housing bubble. But if the monthly mortgage payment is comparable to what the consumer would be paying in rent for a place to live, the debt becomes manageable.

That’s the key — being able to manage your debt. And this is where so many people go wrong. They run up high-interest credit card bills on multiple cards, take on a couple of new car payments and end up borrowing more money to make payments on old debt.

Before the economy crashed in the Great Recession, consumers were using debt to keep the economy growing. When credit sharply tightened in late 2008, consumers and the economy suffered.

Household debt is down

Since then, many consumers have worked hard to pay down debt. According to the U.S. Census Bureau, the percentage of U.S. households holding some form of debt declined from 74 percent to 69 percent between 2000 and 2011.

That’s the good news. The bad news is the people who still have debt have more of it. The median amount of household debt increased over this period from $50,971 to $70,000 in 2011 constant dollars.

While the stereotype is young consumers running up credit card debt, the report shows it’s older consumers who have experienced the largest percentage increase in debt.

“Those 65 and over became more likely to hold debt against their homes, and their median housing debt increased, as well, which explains a significant portion of the increase in their overall debt between 2000 and 2011,” said Census Bureau economist Marina Vornovytskyy.

This is not to suggest you should avoid debt altogether, although some people definitely hold to that view. Rather, the question is how much debt is manageable?

Debt-to-income ratio

For a clue, let’s look at it from a lender’s perspective. When you apply for a mortgage, the lender will measure your debt and obligations and arrive at your debt-to-income ratio.

This is the percentage of your monthly gross, pre-tax income that is used to pay your monthly debts. It’s a combination of two number. The first is the percentage of your income that will be used to pay your mortgage. The second number adds in other debt — car payments, credit cards, installment and student loans.

The mortgage industry wants that second number to be no more than 38, meaning the borrower’s combined debt payments each month, including mortgage, should take up no more than 38 percent of their gross, pre-tax income.

Chances are, most consumers have no idea what that number is so it is easy to get over-extended. Credit card debt is especially hard to manage because the interest rates are high and the minimum payment required isn’t usually enough to make much headway on paying it off.

Pay credit card balances in full

That’s why consumers who are just starting out should avoid allowing credit card balances to accumulate. Do not purchase something with a credit card that you cannot pay for, in full, at the end of the month. In some cases a major purchase, like a new refrigerator, could be carried for a short time. Just make sure you have a plan in place to pay it in full within a short period of time.

But when you charge restaurant meals, for example, make sure you pay for those, in full, at the end of the month. A meal at your favorite restaurant, running up interest charges of 21% each month, will turn out to be very expensive.

Avoiding too much debt requires a household budget. Make a list of monthly expenses, divided between “needs” and “wants.” Making these hard choices can help you avoid getting into debt in the first place.

Mark Huffman

According to the latest Federal Reserve figures, Americans owe a total of nearly $2.8 trillion in consumer debt – not including mortgages and home equity loans. Considering that there are 315 million Americans according to the US Census Bureau, this means that the average American owes about $8,900 in non-mortgage related consumer debt. While this may sound like an alarmingly high number, it’s even more shocking to learn that most Americans don’t use a budget to track their spending or manage their personal finances. According to a recent survey released by the National Foundation for Credit Counseling, over half of Americans (56%) do not use any type of budget whatsoever.

Coincidentally, 90% of the average debt figure is the amount that the average American spends on non-essential items each year. Based on the latest annual Consumer Expenditures report released by the Bureau of Labor Statistics, Americans are spending an average of nearly $8,100 a year on non-essential items such as dining out, clothing, entertainment, and alcohol. It’s pretty clear that discretionary, or non-essential spending has aggravated, if not caused, the consumer debt problem. If people were able cut down their non-essential spending they would have a much easier time paying off debt.

The most effective way to cut down on discretionary spending and build savings is to use a budget. Janet Kim, founder of Savvy Spreadsheets, said she saved almost $3,000 in the last four months since she’s created a budget spreadsheet and actively monitored her spending. As someone who lived paycheck to paycheck for many years prior to budgeting, Janet is now a believer in the power of budgeting. She says that her savings grew despite no major change in lifestyle and believes that the sheer act of tracking expenses subconsciously makes people spend less.

With so many budgeting solutions out on the market, it’s bewildering why so many Americans are still not using one. Janet has some theories why. She says that software solutions can be prohibitively expensive and online tools can raise security concerns. Therefore, many people are drawn to idea of an inexpensive spreadsheet that can be downloaded and accessed offline. The problem is a lack of simple templates that people actually want to use. She says, “Although there are a ton of free budget spreadsheets out there, many of them are counter intuitive and painful to use. People have a lot going on these days and the last thing anyone wants is the added stress of dealing with a complicated budget worksheet.”

Savvy Spreadsheets