Few Americans have escaped the reach of the financial crisis. We live in a new era of diminished wealth, prolonged unemployment, and general economic uneasiness. The difficult financial climate has led many consumers to adopt a new approach to a common budget problem – credit cards. In a recent survey, two-thirds of consumers said that the financial crisis has fundamentally changed their view of debt, and that they’re less likely to borrow. If it were only that easy! Even though most people are eager to get a handle on their debt these days, more and more are relying on credit cards to meet their essential needs.
As the recession really took hold in 2009, many experts weren’t surprised when consumers attempted to break their dependence on credit. As that year began, credit card debt was on pace to reach $1 trillion dollars. However, the worsening economy caused many families to take a closer look at their balance sheets. In an effort to regain control of their earnings, people undertook a concerted effort to pay down credit card debt. In pursuit of a debt free lifestyle, many consumers took a break from credit cards – a move that ironically helped slow the country’s economic growth. Two short years later, Americans owe less than $800 billion toward revolving credit, but lately we’ve begun to see a resurgence in our personal debt numbers, and not for traditional reasons. People aren’t buying big-screen TVs and gaming consoles, they’re paying for life’s essentials with their credit cards. The lack of appropriate savings brought about by the dismal economic climate has forced some Americans deeper into debt.
Since the end of 2009, the rate of credit card debt has increased by 368%. According to the most recent Federal Reserve figures, Americans amassed $18.5 billion in credit card debt during the second quarter of 2011 – a 66% increase over the same quarter in 2010. Although these numbers are staggering, there are some equally impressive numbers regarding economic stability. According to an Absolute Strategy Research report, in 2009, 28% of Americans felt that their spending exceeded their earnings – a deeply disturbing trend. However, in 2011, only 13% of Americans feel the same way.
Despite the increase in credit card debt, many Americans feel as though they’re in a better overall position in 2011 versus 2009, with a significant number of consumers committed to building savings. Many people entered the recession with high credit card debt, and felt the strain of managing their obligations throughout the ensuing chaos. We still have high levels of unemployment and underemployment, low consumer confidence levels, and a battered housing market, but people are trying to make the best of the situation by building cash reserves for whatever comes next. This, however, does not bode well for the future of our economy.
The American economy is, essentially, in the middle of a protracted game of chicken. Businesses are holding on to capital because of economic uncertainty. Instead of investing in labor and growth, corporations are waiting on the sidelines. Consumers are taking the same approach, but that’s precisely the problem. Because of the losses in the housing and stock markets, people aren’t exactly eager to take on “unnecessary” debt. Americans have lost a considerable amount of wealth, and when we feel less wealthy, we’re less likely to buy luxuries, especially big-ticket items. If consumers don’t spend, businesses won’t invest, and if businesses don’t invest, consumers won’t spend. If we’re lucky, we’ll be around to see who wins…
Will consumers begin spending anytime soon? Well, that’s a difficult question to answer. Although some Americans feel more comfortable about their financial situation, it’s clear that others do not. Credit card debt is increasing, but for more serious reasons. To many Americans, credit is now a lifeline, not a luxury, which spells bigger trouble as our economy continues to struggle. And while it’s true people have finally begun to build savings, they aren’t necessarily ready to resume full participation in our economy. Many who participated in the Absolute Strategy Research indicated that, while they’ve saved more over the last couple of years, they aren’t prepared to take any risks with those savings. Until the American economy shows signs of strengthening, it’s clear that Americans will continue to hold onto their earnings, thereby prolonging our economic woes. Until next time, when I hope to have better news, I’m Thomas Fox for Cambridge Credit Counseling.