Economists see rising household debt as a positive sign

For the first time since the Great Recession hit, U.S. households are taking on more debt than they are shedding, an epochal shift that might augur a more resilient recovery.

For two of the last three quarters, U.S. households’ total outstanding borrowing on things like credit cards, mortgages and auto loans has increased after falling for 14 consecutive quarters. Some economists even see an end to the long, hard process of “deleveraging” — as they refer to the cutting of debt relative to income or the nation’s economic output. That process, they say, has been a central reason for the extraordinary sluggishness of the recovery.

“We’re at an inflection point,” said Kevin Logan, the chief U.S. economist for HSBC. “Debt is less of a burden” for households, he said.

Closely watched economic figures underscore households’ nascent sense of strength. Despite tepid growth and still-high unemployment, consumer confidence has soared to a five-year high, according to a survey by Thomson Reuters and the University of Michigan. And economic growth numbers for the third quarter showed household spending picking up pace as well.

The drop in overall debt is in no small part because of foreclosures, delinquencies and write-offs by lenders, which are slowing but not stopping. But the struggle to pay down old debts might not prove such a drag on economic growth in the future.

“We’re not getting a tail wind. We’re losing a head wind,” said Mark Zandi, chief economist at Moody’s Analytics, who said of the deleveraging process for households and businesses, “it’s basically over.”

Experts estimated that the overall level of debt, compared with income or economic output, would continue to fall for the next one to three years — with the end of deleveraging coming as early as mid-2013 and as late as the end of 2015.

“By just about any metric, we’ve made a huge dent in a significant problem, but I don’t think we’re finished yet,” said Liz Ann Sonders, the chief investment strategist for Charles Schwab & Co. “The distinction is that deleveraging will no longer be a big drag on the economy, like in the first couple years after the crisis.”

In the run-up to the recession, U.S. households took on trillions of dollars of debt that they could not easily afford, given tepid rates of wage growth. The collapse of the real-estate bubble and ravages of the recession have forced them to pay down or prompted lenders to write off more than $1 trillion of it, according to Federal Reserve data.

Still saddled with heavy debt burdens during the weak recovery, millions of U.S. households cut back spending on food, cars and other goods. On top of that, relatively few families have been willing or able to take out loans or lines of credit. Thus, the proportion of household debt to personal income has fallen to its lowest level since the mid-2000s from its recessionary-era peak.

Now, with the economy more stable and interest rates at generational lows, Americans might finally feel more comfortable taking out a loan on a new car or putting money down on a mortgaged home. With their finances more in balance, workers might start spending less of their paychecks paying off old loans and more on leisure or household goods.

Given the importance of consumer spending to the U.S. economy, those changes might translate into a more resilient economy, analysts said.

U.S. households’ biggest debt burden is in mortgages, given that a home is far and away the largest purchase the average family ever makes. As the foreclosure crisis grinds on, the total amount of outstanding mortgage debt continues to fall, Federal Reserve figures show.

A broader turnaround in the housing market, which seems to be in its early stages, might be helping to buoy consumers’ confidence, economists said, as the combination of low interest rates, thawing credit conditions and an aggressive effort by the Federal Reserve has helped to put a floor under falling home prices.

New York Times

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Household Debt Seen Jamming US Recovery

Household debt is a major headwind and the biggest obstacle blocking a sustainable U.S. recovery, Yahoo reported.

Yahoo Daily Ticker’s Aaron Task and Henry Blodget offered a laundry list of evidence that household debt is a significant economic problem.
“We have this absolute mountain of household debt, starting with consumer debt,” said Blodget.

The Federal Reserve Bank of New York said U.S. households reduced their debt by $1.3 trillion between the third quarter of 2008 and June 2012. But Yahoo noted that household debt levels are still higher than they were before the financial crisis, and 30 million Americans have on average $1,500 of debt subject to collection.

“It could take a couple of decades to work off,” Blodget said, citing similar long debt-reduction horizons after the Great Depression and after World War II.
Task noted some of the biggest U.S. multinationals that depend on household spending are showing signs of weakness in their third-quarter earnings reports. As an example, he noted Dunkin’ Brands lowered its guidance.

“If America’s running on Dunkin,’ maybe America’s not running so fast,” he said.
According to the Bureau of Labor Statistics, average hourly earnings fell 0.3 percent from August to September and 0.2 percent from September 2011 to September 2012.
Meanwhile, a new survey from the Center for Housing Policy and the Center for Neighborhood Technology found that for every $1 increase in income in the past decade, housing and transportation costs rose $1.75.

In addition, the costs for housing and transportation rose by 44 percent in the nation’s 25 largest metropolitan areas between 2000 and 2010.

The survey concluded U.S. families with moderate income now spend an average of 59 percent of their income on housing and transportation alone, leaving little available for other types of spending.

John Morgan

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Can’t fix error in your credit report? Call Consumer Financial Protection Bureau

If there’s something’s strange in your credit report, who you gonna call?

Not Ghostbusters.

If something’s weird and it don’t look good, who you gonna call?

Sorry, Ghostbusters still won’t help, even though consumers often describe being haunted by errors in their credit reports that they can’t get corrected.

If you haven’t been successful in getting a credit bureau to address problems with inaccurate information in your credit report, you might have felt alone in pressing for a resolution. You probably had no idea who to call.

That’s changing. Now you can call the Consumer Financial Protection Bureau. The watchdog agency has begun accepting individual complaints about credit bureaus. The CFPB will be investigating inaccurate information on credit reports, the improper use of people’s reports, the inability of consumers to obtain copies of their reports or credit scores, and problems with identity-theft-protection services.

“This is a big step for the federal government, which has never had widespread access to information about the credit-reporting industry,” said Bill Hardekopf, chief executive of LowCards.com. “It will help bring transparency and public accountability to credit-reporting agencies. Until now, credit agencies have been like the Wizard of Oz — powerful but unapproachable.”

The information in a credit report is used to generate a credit score. Errors in your file can lead to the denial of credit, a job or insurance.

“Credit scores now cast long shadows over many areas of our personal lives,” Hardekopf said. “The credit score is how businesses judge you and determine the interest rate you will pay. Every American deserves an accurate report and the chance to easily dispute errors and get timely corrections.”

The credit-reporting industry has maintained that the majority of reports are error-free and that it is rare for a mistake to affect the credit terms a consumer gets. In a study released last year, researchers found that less than 1 percent of credit reports had errors that could adversely impact consumers. The study was funded with a grant from the Consumer Data Industry Association, a trade group that represents consumer data companies.

Consumer advocacy groups have produced studies showing the opposite — that many reports are riddled with errors. A much-cited study by the National Association of State Public Interest Research Groups found that almost 79 percent of all credit reports had some type of error.

An investigation this year by the Columbus Dispatch looked at 30,000 consumer complaints filed with the Federal Trade Commission and attorneys general in 24 states. The newspaper found an error rate of about 30 percent. “The complaints document the inability of consumers to correct errors that range from minor to financially devastating,” the Dispatch said. “Consumers said the agencies can’t even correct the most obvious mistakes: That’s not my birth date. That’s not my name. I’m not dead.

If you have an issue with a credit bureau, your first stop isn’t going to be the CFPB. The agency wants you to initially go through the credit-reporting company’s complaint process. If the problem isn’t fixed, then you should contact the consumer agency. And when you do, you’ll be given a tracking number to check on the status of your complaint. As part of the CFPB’s process, you’ll have an opportunity to dispute the company’s response to your complaint.

The CFPB said it expects consumer-reporting agencies to respond to complaints within 15 days. The response has to include steps they have taken or plan to take to correct any errors.

You have several options to file a complaint. You can go online to www.consumerfinance.gov/ complaint or call, toll-free, 1-855-411-2372. You can fax your complaint to 1-855-237-2392 or mail it to the Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa, 52244.

With the CFPB on your side, now’s a good time to review your credit report. You can receive free copies from the three major national credit-reporting companies — Equifax, Experian and TransUnion — every 12 months. The only official site to get the reports is www.annualcreditreport.com . Please be aware there are copycat Web sites that offer a free report but require you to sign up for credit monitoring or a similar product.

The move by the CFPB to intervene on behalf of consumers with errors they can’t get fixed is welcome, because the information in the reports affects so many areas of our financial lives. So if there’s something strange in your report, just call.

Michelle Singletary

 

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Credit Score Confusion

Think you’ve got a solid score? Lenders may have different numbers on you.

Smart borrowers know to check their credit scores before applying for a home mortgage loan. But what if that score was unreliable? What if the scores that consumers can acquire from major credit bureaus or sites like Quizzle.com were different than the ones used by lenders?

The results of a new study conducted by the Consumer Financial Protection Bureau and involving 200,000 credit files from the three primary credit bureaus (Experian, TransUnion and Equifax) suggest that this is true for many borrowers. About “one out of five consumers would likely receive a meaningfully different score than would a lender,” according to the study.According to the CFPB, the formulas employed to produce credit scores not only differ from one company to the next, but disparities can occur within the same company. For example, FICO, the most oft-used score, has more than 49 different credit scoring models available to lenders.

This discrepancy can have a negative impact on borrowers. Consumers who think their credit scores are higher than that determined by a lender can make inappropriate purchasing decisions or apply for credit cards for which they’re not qualified.

On the other hand, those who think their scores are too low may decide not to apply for credit or may pursue credit offers with unfavorable terms or higher rates than they need to pay.

Joe Chatham, president of Chatham Mortgage Partners, Westlake Village, Calif., says that while the credit score issue is confusing, understanding how the three credit bureaus use these numbers helps explain the score discrepancies.

“Each credit bureau has a different scoring model because each has different data, depending on subscribers and organizations that choose to report to them,” Chatham says. “Thus, depending on which [FICO] score the lender uses to qualify a borrower, that borrower may be subject to different mortgage pricing models. And the consumer scores that people pay to see via subscription or purchase are not the same ones that lenders use. Most lenders will pull all three models and use the middle score of the borrower to qualify.”

While many lenders use FICO scores to make lending decisions, “each lender has its own strategy, including the level of risk it finds acceptable for a given credit product,” says David Mays, mortgage lending director with Renasant Bank, Birmingham, Ala. “There is no single cutoff score used by all lenders, and there are many additional factors that lenders use to determine your actual interest rates.”

While it’s important to know that score variations exist, Chatham says there’s little that consumers can do about it, besides annually monitoring and clearing up inaccuracies in their credit reports and building a good credit history by making on-time payments and reducing the amount of debt owed.

“Lenders are not going to change the models they use. If consumers want to shop a loan based on a concern that the lenders will use different scoring models, they can call and ask which models the lender uses and shop those lenders who use different models,” Chatham says. “However, they may hurt some overlapping scores because of multiple inquiries.”

Like the CFPB, Mays recommends comparing loan offers from multiple sources.

“It’s always wise to shop around with different lenders for the best rates and terms because different lenders have different appetites to lend,” Mays says. “Also, some lenders use different scoring models and some don’t pull [scores from] all three bureaus, which would give the borrower the benefit of a higher FICO score with another bureau.”

When shopping loans, be sure to carefully compare the interest rate and annual percentage rate, the monthly payment and all closing costs and fees (including points, origination fees, charges for title and appraisal, etc.), experts say. Ask for a good-faith estimate and a clarification of any items you don’t understand within it.

ERIK J. MARTIN

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How debt relief has changed, two years after new FTC rules

It has been two years since the Federal Trade Commission (FTC) implemented new rules regulating the debt relief industry. Since then, many unscrupulous debt relief firms have gone out of business. Today, it is easier for consumers to find and work with trustworthy companies. This is good news because many consumers still need help with debt.

Consumers today carry $864.2 billion in revolving debt (the category that includes credit card debt). The average American who carries credit card debt owes more than $15,500. According to recent statistics from the Federal Reserve, the total household debt in the U.S. is now at $11.4 trillion.

Some consumers in financial straits turn to debt settlement for assistance. For these consumers, the FTC regulations introduced in 2010 were a step in the right direction. While the rules exist to protect consumers who need help with unmanageable debts from deceitful players, it still is important to understand what these rules mean when seeking debt relief help.

1. Understanding debt settlement.

With a debt settlement plan, it is sometimes possible to reduce total principal owed by about half. Debt settlement firms can work with creditors on consumers’ behalf to obtain lower pay-off balances. Consumers do not make payments while going through this process, but rather accumulate funds to pay off the negotiated balance. Programs generally take two to four years to resolve a consumer’s debt. Debt settlement can be helpful for individuals who are unable to make minimum payments on credit card debt, and who might otherwise have to consider credit counseling or bankruptcy.

2. About the FTC rules.

Prior to the implementation of the FTC rules in 2010, it was harder for consumers to identify a reputable debt relief company. The rules require debt relief companies to renegotiate, settle or reduce the terms of at least one debt, with the consumer’s agreement, before collecting fees from the consumer. Fees can’t be collected until the consumer has made at least one payment to the creditor on the renegotiated plan. In addition, debt settlement companies must disclose how long it should take to see results, program costs and any negative consequences that may result. The rules also define the advertising claims these companies can make.

3. Finding a debt settlement provider.

It is still legal for debt settlement companies (and law firms) that do not participate in telemarketing to charge up-front fees. But there is no need to sign with one of them when there are reputable debt relief firms that charge only when they get results. Look for a firm that belongs to the American Fair Credit Council (AFCC). The AFCC will not allow membership to any firm that charges an advance fee, regardless of whether or not the FTC allows the firm to do so. The organization also enforces the strictest code of conduct in the industry (imposing even stricter rules than the FTC’s). In addition to AFCC membership, look for a firm that requires counselors to receive certification from the International Association of Professional Debt Arbitrators.

4. Proceed with caution.

While the 2010 FTC rules provide consumers with more protections, some bad players still exist in the field. Consumers should ask a debt relief provider or consumer credit advocate as many questions as necessary to understand how the process works and confirm the firm is legitimate. Impatient debt counselors, high-pressure sales tactics and claims that sound too good to be true (such as “eliminate your debts, guaranteed!”) are warning signs of firms that should be avoided. Consumers should look for a firm that has an established, long-term record of successfully getting results for customers.
Fortunately, the majority of credit advocates in business today are committed to investing the effort and resources to help consumers in an ethical manner. Ask the companies you talk to how they comply with the FTC’s rules and what they can do to help get you back on your feet financially.

Andrew Houser

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CFPB taking complaints on credit reporting, giving consumers greater protections

The Consumer Financial Protection Bureau (CFPB) today began accepting consumer complaints about credit reporting, giving consumers individual-level complaint assistance for the first time at the federal level, announced by the CFPB Office of Communications.

The CFPB was founded as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was signed by President Obama on July 21, 2010. Dodd-Frank, as it is called, was passed in response to the housing and financial crisis. The CFPB was founded as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which passed July of 2010 in response to the financial crisis. The CFPB began operation on July 21, 2011.

“Credit reporting companies exert great influence over the lives of consumers. They help determine eligibility for loans, housing, and sometimes jobs,” said CFPB Director Richard Cordray. “Consumers need an avenue of recourse when they feel they have been wronged.”

Richard Cordray was appointed as director of the CFPB on January 4, 2012, by President Obama, who issued a recess appointment to install Cordray as director through the end of 2013. Harvard Law School professor and bankruptcy expert Elizabeth Warren, who was special consultant in charge of implementing the bureau, was removed from the running for director after Obama administration officials became convinced she “could not overcome strong Republican opposition.”

Elizabeth Warren went on to seek the Democratic nomination for United States Senate in Massachusetts against the incumbent Republican Senator, Scott Brown.

Consumer reporting agencies, which include what are popularly called credit bureaus or credit reporting companies, are private businesses that track a consumer’s credit history and other consumer transactions. The credit reports they generate – and the three-digit credit scores that are based on those reports – play an increasingly important role in the lives of American consumers.

The largest credit reporting companies issued more than 3 billion consumer reports a year and maintain files on more than 200 million Americans. The consequences of errors in a consumer report can be catastrophic for a consumer, shutting him or her out of credit markets, jeopardizing employment prospects, or significantly increasing the cost of housing.

Although a small number of large businesses dominate the credit reporting market, there are many consumer reporting agencies in the United States. The market includes: the three largest credit reporting companies that sell comprehensive consumer reports; consumer report resellers that repackage information they buy from the largest companies; and specialty consumer reporting companies that primarily collect and provide specific types of information like on payday loans or checking accounts.

For consumers who believe that there is incorrect information on their credit reports or who have an issue with an investigation, before filing with the CFPB, they should first file a dispute and get a response from the consumer reporting agency itself. There are important consumer rights guaranteed by federal consumer financial law that may be best preserved by first going through the credit reporting company’s complaint process. Once that process is complete, if the consumer is dissatisfied with the resolution or if the consumer reporting agency does not respond, the CFPB is available to assist.

A consumer can come to the CFPB if he or she, for example, has issues with:

• Incorrect information on a credit report; • A consumer reporting agency’s investigation; • The improper use of a credit report; • Being unable to get a copy of a credit score or file; and • Problems with credit monitoring or identity protection services.

Today’s announcement extends the kinds of complaints the CFPB already handles. The CFPB began taking credit card complaints when it launched on July 21, 2011. Since then, it has expanded to take complaints on mortgages, bank accounts and services, consumer loans, and private student loans.

Consumers are given a tracking number after submitting a complaint with the CFPB and can check the status of their complaint by logging on to the CFPB website. Each complaint will be processed individually and sent to the company for response. The CFPB expects the consumer reporting agencies to respond to complaints sent to them within 15 days with the steps they have taken or plan to take. Consumers will have the option to dispute the company’s response to the complaint.

In July 2012, the CFPB adopted a rule to begin supervising larger consumer reporting agencies that have more than $7 million in annual receipts. The CFPB’s supervisory authority extends to an estimated 30 companies that account for about 94 percent of the market’s annual receipts. The CFPB’s authority to supervise these companies became effective Sept. 30, 2012.

In September, the CFPB also released a study looking at credit scores, the three-digit numbers, based on a credit report that are assigned to consumers and used to determine credit worthiness. The study compared credit scores sold to creditors and those sold to consumers. The study found that about one in five consumers would likely receive a different score than the score provided to a lender.

Questions and answers on credit reporting are available on AskCFPB. A consumer advisory on credit reporting is also available.

To file a credit reporting complaint, consumers can: • File online at Consumer finance’s website. • Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372) • Fax the CFPB at 1-855-237-2392 • Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244

Consumers can receive free copies of their credit reports every 12 months from AnnualCreditReport.com. This is the only authorized source that provides free disclosures from the three major national credit reporting companies – Equifax, Experian, and TransUnion.

John Presta

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American Consumers Aren’t Really Paying Down Credit-Card Debt

Even as credit-card balances decline, American consumers have been relentlessly adding debt.

Have you heard the reports that credit-card debt is falling, that Americans are chipping away at amounts owed from the tight times of the recession? They’re wrong. We haven’t actually paid off any credit-card debt since the onset of the downturn in 2008. And we are set to add a whopping $43.5 billion to our tab in 2012.

Let me explain. Consumer credit data is reported by the Federal Reserve each month, but the published statistics don’t include the billions of dollars banks are required to write off the books each year. And in the past several years, there’s been an epic level of write-downs: $85.6 billion in 2009, $77.1 billion in 2010, $45.5 billion in 2011, and $17.2 billion so far in 2012.

This matters for two big reasons. While charge-offs reduce the outstanding credit-card balances that banks report, consumers are still on the hook for charged-off credit-card debt for 3 to 15 years, depending on the state, and banks still try to collect on it. Want to tell them it doesn’t count?

Second, the charge-offs give us a misleading picture of what consumers are actually doing. If banks charge off $10 billion in one quarter, but consumers add $8 billion in new credit-card balances, the figures will show a decline in overall borrowing—at a time when consumers actually piled on more debt. That’s what has been happening in the economy. Outstanding credit-card balances have decreased by $190.5 billion since 2008. Great! But there have been $226 billion in charge-offs in that period. So instead of paying down a hefty amount, consumers have actually added $35.5 billion to their credit-card bills. If people were really paying down credit-card debt, the outstanding credit volumes would be falling much more rapidly.

The most recent numbers don’t paint a much more encouraging picture either.  While we did a better job paying our credit-card bills during the first two quarters of 2012 than during the same segment of 2011, the improvements were, unfortunately, only marginal. And we’re expected to tack $43.5 billion onto our overall tab by the end of 2012.

Does it matter? Absolutely.

Credit-card debt reflects our spending habits as a society and, more importantly, whether or not we tend to pay back what we owe. A societal pay-for-it-later mentality can indicate that people are strapped financially and vulnerable to being dragged down by any unexpected cost or interruption of income, such as could be caused by the world economy taking a turn for the worse. Widespread defaults would, of course, only complicate matters.

A steady pay down, on the other hand, would seem to indicate that consumers finally understand the importance of living within their means and, armed with increased spending power borne from the continuing economic recovery, are working to become debt-free entirely.

The fact that our reliance on credit-card debt is actually worsening, despite reports to the contrary, should therefore seem a bit more significant now.

The good news is that charge-offs and delinquencies are actually reaching pre-recession levels, having dropped 20 percent and 37.2 percent, respectively, since the first quarter of 2011. But even that news comes with a caveat. People are still overspending; the improved economy is simply helping them stay afloat. That can last for a while, but once interest becomes overly burdensome and there aren’t as many jobs to go around as once was the case, well, you know what happens next.

In order to avoid reaching that tipping point, two things need to happen: (1) We need to figure out a way to rein in spending; and (2) We’ve got to attack our balances. Interestingly, just as credit-card usage trends have helped us identify the inherent problem with consumer spending, they may also offer a solution.

People aren’t going to stop using plastic, but they can use it more strategically. For starters, designating a single credit card as being only for everyday purchases provides a better perspective on personal finances and a warning system for when spending starts to get out of hand. By definition, living within your means requires paying for everyday expenses in full every month. Next, consumers should rank recurring expenses in order of importance and cut those that exceed the amount they’ve determined they can spend each month. Most issuers allow cardholders to set alerts for when the balance crosses a certain threshold. Using a card for everyday spending also effectively enables consumers to subsidize spending with the best possible rewards, since they don’t have to worry about interest rates.

Finally, consumers should focus on 0 percent cards and offers as ways to tackle their debt problems. Consumers would be smart to designate a separate card as being strictly for revolving debt, and then transfer any existing balance to it. A credit-card calculator can help figure out which card saves the most money. A borrower with the average household credit-card debt of around $7,000 can expect to save somewhere in the neighborhood of $800 in interest charges over 15 months by using the Slate Card from Chase, which offers a 0 percent introductory rate for 15 months and does not charge a balance-transfer fee.

Odysseas Papadimitriou

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Household Debt Has Fallen to 2006 Levels, But Not Because We’ve Grown More Frugal

U.S. household debt has finally fallen back to pre-recession levels. So, we’ve finally learned our lesson about spending more than we make, right? Well, not really. The real reason our debt has dipped is that so many Americans defaulted on bills they couldn’t pay.

Moody’s Analytics and the Federal Reserve released a batch of figures last week showing a significant dip in U.S. household debt. According to Moody’s, the combined amount owed on our home mortgages, credit cards, and other outstanding liabilities have gotten down to about $11 trillion, which is about what it was in 2006. Federal Reserve numbers show that household debt as a share of disposable income dipped to 113% in the second quarter of 2012. It hit 134% in 2007, right before the recession.

So how exactly did we finally got our debt under control? A growing sense of fiscal responsibility has certainly played a role. This, after all, is the era of extreme couponing; and after years of out-of-control spending on bigger and bigger houses, we’ve become a nation of renters. A number of polls also show that we believe we are more frugal and cost-conscious than before the recession.

The decline in household debt, however, doesn’t necessarily mean we’ve changed our ways. In fact, says Mustafa Akcay, an economist at Moody’s, “nearly 80% of deleveraging is caused by defaults.” Only 20% of the decrease comes as a result of what he calls “voluntary deleveraging,” i.e. the hard work of paying down our debts faster than we borrow.

“Most of the decline in outstanding aggregate debt has been defaults,” agrees Brookings Institution economist Karen Dynan, who last year analyzed financial institution charge-offs of loans that have gone bad and found that the value of defaults was about two-thirds as large as the total decline in household debt.

Still, Dynan believes that defaults have become a lot less important over the past year. She cites Federal Reserve data showing that charge-offs by banks for mortgages and consumer loans have dipped recently. She also attributes lower debt levels to a reduction in new borrowing — though that’s not necessarily a sign that consumers are any less willing to borrow. “Banks are being super-cautious about lending,” she says. “There is a substantial group of households that have much less debt now simply because they have not been able to get loans because terms are so tight.”

No matter the reason, though, household debt has dipped to much more manageable levels, and economists are now hoping that consumers can help bolster a stronger recovery in 2013.
Consumer spending did increase in recent months — not because we bought more, but because we paid more, with to gas rising steadilthe price of everything from food to gas rising steadily. When adjusted for inflation, in fact, our level of spending has remained more or less constant. This additional spending led to a dip in our savings rate in recent months. We saved only 3.7% of our disposable income in August and 4.1% the month before. The U.S. savings rate hit a post-recession high of 5.6% in the third quarter of 2010.

Ackay says that if Congress avoids the coming fiscal cliff – a combination of expiring tax cuts and federal spending cuts – lower debt levels are likely to give the economy a significant boost. “We could say that Americans are getting their finances in order,” says Akcay. “They are positioning themselves to take on more debt and spend more of the rest of their income.”

“With the lower debt burden and record low borrowing costs, households are positioned to fill in the gap in 2013,” he adds. “Whether they will or not depends on how policymakers address the fiscal issues.”

Josh Sanburn

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The Medical Debt Crisis Isn’t Going Away… Deal With It

It’s no secret that medical bills in collection can ruin your credit. In  fact, it may lower a score by “100 points or more” for someone with a spotless  credit history, according to FICO. As tens of millions of Americans are  paying off medical bills over time, the potential for damaged credit is  great. Many government agencies are beginning to take notice of this  problem. Unfortunately, the consumer credit reporting industry is fighting these  efforts for consumer protection every step of the way.

Just last month, the Center for Public Integrity released a report — Cracking  the Codes — scrutinizing the use of electronic health records by doctors and  hospitals.  They documented improper billing of Medicare for more  complex and costly services than delivered.  Following this report, HHS  Secretary   noted “troubling indications” that some providers were billing for  services never provided and vowed to prosecute.  How many bills related to  these procedures hit consumer credit reports?

Earlier this summer four United States Senators asked the Consumer Financial  Protection Bureau (CFPB) to investigate the issue of medical collections. By  late August the CFPB responded, saying they had begun a review of “the  treatment of medical debt in both the debt collection and credit reporting  industries.” Their investigation is welcome news for the estimated one in four  Americans living in families where at least one family member is paying off  medical bills over time.

The CFPB is not the only federal body looking into the problem of medical  debt. In September, the Subcommittee on Financial Institutions and Consumer  Credit of the U.S. House of Representatives Committee on Financial Services held  a hearing entitled “Examining the Uses of Consumer Credit Data.”  The  topic of medical debt was prominently featured in the hearing.

While witnesses acknowledged the prevalence of errors in medical billing,  only one felt that it would be inappropriate to correct these errors by  suppressing them from credit reports once fully paid or settled.

Rather than acknowledge these errors, a representative of the consumer data  industry (which includes the credit reporting industry) chose to gloss over the  problems by raising the equivalent of the “Twinkie Defense.” In defense of the industry, the  representative cited the 2.4 million consumers who had undergone Botox  injections in 2010 and consumers who are making choices for elective procedures  and surgeries (noting procedures such as liposuction, cosmetic eyelid surgery,  facelifts, forehead lifts, lip augmentation, nose surgery, tummy tucks, laser  hair removal), arguing that they shouldn’t get special treatment.  Taking a  hard line, he said that “these choices are no different than making a purchase  in a retail store and the debts should not be deleted.”

Get real, this isn’t about Botox, it’s about cancer treatment, care of  chronic disease, and emergencies like a burst appendix.  And to make  matters worse, these illnesses are often followed by a pile of confusing  bills.  It is stunning that the consumer data industry simply cannot face  the fact that much of the medical payment data included on consumer credit  reports is erroneous.

During this election season, it’s reassuring that elected officials from both  parties can work together to call attention to a problem plaguing millions of  Americans.  It is also comforting to know that the CFPB is taking notice of  underlying factors that destabilize hardworking families; factors like medical  collections.  In the words of CFPB Director Richard Cordray, “Consumers who  have medical collection reported on their credit file face real-world  consequences, they can face a harder time getting a loan approved or even  getting a job.”

Hopefully, this federal attention will result in action that requires the  removal of medical accounts from credit reports.  One legislative proposal  currently enjoying rare bipartisan support is the Medical Debt Responsibility Act. It would require the  removal of medical collections within 45 days of being fully paid or  settled.

Given that the CFPB just initiated its investigation, it is not yet clear  what they might propose.  But one thing is clear, the need for the consumer  data industry to stop stonewalling efforts to address the unfair practice of  penalizing people who’ve had medical bills sent to collection. Hiding behind the  “Botox Defense” is an insult to the millions of Americans who are now paying the  price because of medical collections.

Mark Rukavina

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What Would Happen if We All Paid Off Our Debt?

It’s no secret that consumers are saddled with debt. Combined, in the United States, individuals owe more than $12.6 trillion dollars. Since approximately 24 percent of households are debt free, and there are around 114 million households in the U.S., the average household is saddled with…

Sit down.

Approximately $145,000 in debt!

I’m about to combine averages and medians for simplicity’s sake, but bear with me: According to the Census Bureau, median household income is $51,881 per year. If the average household did nothing but pay down debt, it would take 2.8 years to pay it all off!

Naturally, it’s absurd to expect an entire household’s income to go to debt. Even if 30 percent of the income were dedicated to debt payoff, it would take 9.32 years.

That seems like a long time.

However, let’s think about the ramifications. If we, as a society, buckled down and committed to paying off debt. What would really happen?

The economy would slump. Consumer spending is roughly 70 percent of GDP.. Since, according to the Federal Reserve Bank of St. Louis, the savings rate is currently 3.7 percent, increasing the savings rate—a corollary to paying off debt—would mean a decrease in spending by 26.3 percent. Because of the decrease in spending, there would be a significant round of layoffs, which would contract the economy further, decreasing household incomes, and probably increasing the time it would take to work through all of our consumer debt. According to Jerry Pace, president of the Crowley business division of Texas Exchange Bank, “We must first identify what the root problem is in the economy…and then basically stop digging when we have dug ourselves into a hole.”

Banks would have to figure out another way to make money. Since the essential tradeoff for a bank is to take deposits, pay you a deposit rate, and then loan the money at a higher rate for a profitable spread, banks would need other income sources. Banks can currently offer interest-bearing deposit accounts, free checking, free bill pay services and other “perks” because they can profitably lend that money which you give them to borrowers while making money for themselves. Banks would have to charge to hold your money, and CDs and money market accounts would disappear. No more free toaster when you open up your Christmas passbook account.

The housing market would dry up. Since people would have to save money to buy homes with cash rather than using a traditional mortgage, demand for homes would drop drastically, and demand for rental housing would increase significantly. The construction industry would plummet, since few people could afford new homes.

The same holds true for the auto industry, although the drop would not be nearly as dramatic. Still, automakers would shift their production from non-economical SUVs to more economical and less expensive cars to provide them at a much lower price point.

Debt

Do-it-yourself providers would bloom, as people would find ways to save money through doing things themselves. Have trouble parking at your local Lowe’s or Home Depot now? Just wait until this national get-out-of-debt program kicked in!

Restaurants would suffer, as people would choose to eat at home to save money.

Enrollment in universities would drop. Smart universities would lower their tuition rates to make them affordable for families and for college students who worked their way through school.

Community colleges and technical and vocational schools would thrive, as students   choose educational courses and vocational skills in careers where they could earn a good living.

That’s not to say we haven’t lived more frugally in the past (or, that Americans are actually cutting spending that drastically). Credit cards, for instance, didn’t even exist before 1946. Mortgages have been around since the Middle Ages, but it prior to the Great Depression, it was common practice in the U.S. to have a 50 percent down, 5-year interest-only loan. So, living in a relatively debt-free society is not an uncommon phenomenon in our history.

Once the time of paying off our debt passes, we would ring in a new era of prosperity. Rather than having so much of our income burdened by interest and paying for past purchases, we could free up that income to save for retirement, spending, and giving. We could take more risks and be more entrepreneurial, as we wouldn’t have mortgages, car payments, and student loans to worry about if our entrepreneurial ventures did not succeed. The country’s net economic power would increase as more money was spent on goods and non-financial services—production rather than monetary intermediaries. We would be back to being able to consume what our country’s economic capacity could produce.

One in four of us live that way today. Just imagine what would happen if the other three joined us.

Jason Hull

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