An Inside Look at the Real Financial Health of the American Consumer

Many Americans, especially folks who are middle-class, carry some debt on credit cards. Data showing the extent of that debt and how card holders are managing with regards to paying their debts on time shed light on the economic situation of those households.

The latest report on this subject from Fitch Ratings, a global rating’s agency, is enlightening. Fitch's credit card data tracking commenced in 1991 and is primarily comprised of data from institutions such as Bank of America, Citibank, Chase, Capital One, Discover, etc.

Here are the highlights followed by my comments:

“The new year began in much the same way 2012 ended for U.S. credit card asset-backed securities with both chargeoffs and delinquencies falling to new lows, according to the latest index results from Fitch Ratings…

According to Fitch's 60+ Day Delinquency Index…delinquencies declined to 1.61%, the lowest level since Fitch launched its prime index in 1991. This improvement has pushed late stage delinquencies 65% below peak levels reached at the end of 2009…

Chargeoffs are now at a new six year low. Losses decreased to 3.88% from 4.18%. Chargeoff rates are 26% lower from the same period last year.

Monthly payment rate (which is the portion of a cardholder’s outstanding balance paid in the most recent month) jumped 1.09% to 24.83%, its highest level historically.”

My Thoughts

Overall, this is very good news for consumers, the U.S. economy and stock market.

Credit card balances which are two months or more delinquent, declined to its lowest level in the 22 years that Fitch has tracked such data. You may wonder how this can be given that we keep hearing how weak the overall economy and economic recovery are. The answer is that the weakest consumers discharged their debt in prior years and others have been paying down their debts.

Chargeoffs, which occur when the bank issuing a credit card throws in the towel on a cardholder’s debt and writes-off being able to collect it, fell to their lowest level since 2007.   

The fact that consumers now in aggregate have a far more manageable debt load is also supported by the monthly payment rate on credit cards jumping to its highest level (nearly 25%) historically.

Some economists have expressed surprise that consumer spending continues to be fairly strong despite the expiration of the 2% payroll (Social Security) tax holiday. For a middle income wage earner with $40,000 in annual salary, this change resulted in an $800 tax increase in 2013.

Consumers seem, so far at least, to have withstood that increased tax, thanks in part to their reduced overall debt burdens. In addition to reduced consumer debt through credit cards, mortgage debt today is also at far more manageable levels than it was before the recession hit which is why home buying and home construction have picked up again.