Bottomless Pit: Consumers Falling Deeper into Debt

Consumer debt may be moderating, but debt delinquencies are ticking up. Those rising delinquencies foreshadow more economic turmoil for U.S. households and domestic credit card issuers.

In the 1989 film The Abyss, a team of Navy SEALs is tasked with saving an American missile submarine in deep ocean waters. Various complications put the rescuers in danger of falling into what appeared to be a bottomless watery pit. American consumers today can relate to the diver's fear of impending doom-as a deepening recession forces many to pile on more debt than they can service.

Prime and subprime debt impacted

Equifax Inc., a credit reporting agency, recently told Reuters that debt delinquencies are on the rise. There were some other disturbing highlights from Equifax's November data on consumer debt:

• More than 12 percent of subprime cardholders were 60 days or more past due, an increase of 0.43 percent from the prior month.

• Nearly 4 percent of subprime auto loan borrowers were at least 60 days past due.

• A full 36.6 percent of subprime mortgage borrowers were at least 30 days behind on their mortgage payments.

• Almost 6 percent of prime mortgage borrowers were at least 30 days past due; this is well below the subprime level, but still high relative to historic norms.

Unemployment, spending hangover

Experts believe the growing delinquencies are related to the combination of increased unemployment and the lagging burden of excessive consumer spending in prior years.

• Increased unemployment. Last year, unemployment rose nearly 2 percentage points between January and November, from 4.9 to 6.7 percent.

• Spending hangover. Between 2005 and 2007, the savings rate in the U.S. remained near zero. Consumers had ample credit cards, and no reason not to purchase the things that they needed. Cash flow shortfalls were covered with plastic, and balances on credit cards swelled. Even though spending moderated in the second half of 2008, borrowers were still servicing those large credit balances. That debt burden is now becoming more intense, as borrowers struggle through the recessionary economy.

Economic turmoil ushers in conservatism

When the global financial crisis heated up in the second half of 2008, American consumers responded by reigning in their spending. In the third quarter of last year, consumer spending actually shrank by 3.8 percent, the largest decline since 1980. Balances on credit cards declined slightly also; Equifax reports that cumulative balances on bank-issued cards fell 0.21 percent to $834 billion between October and November of last year.

Unfortunately, the delinquencies are still rising-an indication that the current economy is taking a toll on American households. In addition, those delinquencies represent another challenge for banks that are already working to purge themselves of bad mortgage loans. Should the past-due debt trend continue, both borrowers and lenders might find themselves sliding towards impending financial doom.